By: Tom Gentile
on August 3rd, 2021
We have reentered the COVID twilight zone. Except, the new Delta variant (that accounts for 83% of the new cases in the U.S.) is even more contagious. While vaccines are working, less than half of the U.S. population is vaccinated. Simply said, we are in for another wild ride.
This worldometer chart illustrates that global COVID-19 cases are starting to surge:
The markets are already reacting to this dismal news.
On July 8, 2021, Japan issued a national state of emergency in Tokyo. The S&P 500 dropped 1.5%+ in response to this order. The state of emergency will continue throughout the Olympic games.
Between Friday, July 23 and Monday, July 26, the S&P 500 dropped 3%. On Tuesday, the S&P 500 bounced with a rise in bond yields. Markets are jumpy and the faster COVID cases rise, the faster stocks will likely fall. Unfortunately, we are well-versed on the effect of this scenario. When this type of volatility occurred in 2020, investment opportunities sprung up around every corner. When COVID-19 first took hold of the markets, the S&P 500 tanked a whopping 35% from 3,386 to 2,191 in a month’s time.
The simplest way to profit in this scenario is to buy puts on the Sector SPDR S&P 500 ETF (NYSE: SPY). Buy 30-60 day, Out-of-the-Money (OTM) puts. For example, right now with the SPYs trading at $430 the SPY Aug 23, 2021 $420 Puts would cost you $4.90 per contract or $490. If the S&P 500 were to drop 10% over the next month, these same puts would be worth approximately $30, a 500% return. If you want to give yourself more time, buy options that expire further out in time.
High Opportunity Sectors
We don’t have to think back too far to remember the hammering airlines, hotels, cruise lines and oil companies took when COVID-19 first emerged. Now, with the spread of the Delta variant, these industries are taking a beating once again. Delta Air Lines (NYSE: DAL), Southwest Airlines (NYSE: LUV), Marriott (NYSE: MAR), Royal Caribbean (NYSE: RCL) and Diamondback Energy (NASD: FANG) have already fallen. Should the Delta variant-driven COVID-19 cases continue to rise, these stock prices will likely drop even further.
As occurred in 2020, the technology and discretionary industries will likely take off again. Online-shopping may surge, benefitting Amazon (NASD: AMZN) and its ilk. If businesses once again instruct employees to work remotely, Zoom Video Communications (NYSE: ZM), Apple (NASD: AAPL) and Microsoft (NASD: MSFT) will skyrocket. These stocks are already rising and will likely continue to do so if COVID-19 cases continue to grow.
These companies are by no means the only ones that will be affected. Look into others in these industries.
It’s not 2020 anymore, and the vaccines should lessen the Delta variant’s impact. So, while we may not experience 2020’s 35% drops, the market will react. This time around we should all be better prepared to capitalize on the volatility.