Since the market lows in March, one theme has been pretty consistent, investors remained wary of stocks directly impacted by the shut down while buying up stocks that arguably benefit from an extended shutdown. Those Covid-defensive stocks represented a small percentage from a numerical count, but created a massive rally off the lows from a market cap standpoint (thanks to stocks like AMZN, MSFT, GOOGL, FB etc). Today's market move higher is quite interesting in that that there seemed to be some profit taking in the winners and some bargain hunting in the losers.
I want to focus on 2 names from each group. Zoom (ZM -6% today) and Peloton (PTON -10% today) amongst today's profit taking and United Airlines (UAL +21% today) and Tripadvisor (TRIP +21% today) where there seems to be some bargain hunting (if not short covering).
Here are the 3 month expected moves from OptionsAI technology for these 4 stay at home vs get out and travel stocks:
Similar charts within each group.
Ways to Play
It's usually not a good idea to buy a stock (or short it if it is indeed short squeezing) that's up 20% on the day but thinking ahead for defined risk options trades if it did indeed provide a more obvious entry point is useful.
TRIP has attempted 2 big rallies since its March lows, both failing to get above ~21.50. Here's a bullish price target for that level, looking out a month and the trades returned from OptionsAI technology:
And here's the same in UAL, targeting recent highs around ~32:
You'll notice that the UAL returns two different call spreads. That is because UAL's recent highs are much higher than the current expected move as priced by the options market. This may be due to the fact that the airlines had another leg down following the news of Warren Buffett dumping those stocks. The 29/32 call spread is an out of the money call spread that costs very little to make a a lot if UAL were to try to take back those recent highs. Of course the trade off is its very low probability. But if things truly have changed in sentiment, or if UAL was indeed forcing a lot of shorts to cover, the options market may be slow to react in how its pricing potential moves.
Now to ZM, a bearish price target in July (2 months out) playing for a decline of about 20% (price target ~130) which is on the expected move from the options market:
And in PTON, a bearish price target, in line with bearish consensus in July (~$35) returns these trades:
You'll notice similar risk/rewards and probability between the two stocks and their Put/Put Spread/Short Call Spread options.
Like I said earlier, it's tough wading into stocks right after such a weird day, but the market may have indicated something today. Picking entries on these stocks is a whole other thing. If one thought this was a new trend and not just a one day event, defined risk trades is a great way to participate, with the caveat that those were big moves already and there may be better entries in the days ahead.