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COVID-19 Shutdowns May Return. Here’s The Perfect Hedge

COVID-19 Shutdowns May Return. Here’s The Perfect Hedge

Back in February 2020, I was as bullish as could be. It’s not that I didn’t know about COVID-19 springing up around the world. I just didn’t imagine there was any way it would wreak the kind of havoc we’ve seen since.

Needless to say, when markets started rolling over, I was ready to buy each drop hand over fist.

Then, something changed…

Lessons Learned from the COVID-19 Crash

The Federal Reserve cut interest rates to zero.

It was a drastic move. They had spent the past 12 months keeping rates steady.

Most traders believed that was what the market needed to rally. But to me, this was a bearish signal. I saw it as a panic move that wouldn’t be enough to stop the bleeding.

So I started getting bearish by adding put options to deliver some quick profits. And those first few trades worked. I handed my Quick Hit Profits readers profits of 40%, 49%, and 66%, each in less than a month.

But then I stayed bearish far too long…

The market bottomed on March 23, 2020. But I was still recommending put options. I sent out three recommendations on March 18, 20, and 26 that all resulted in a loss. It wasn’t working.

So I switched back to calls to rack up a nice win streak. We booked a nine-trade win streak as the market recovered.

Here’s my point…

You can’t ever stay bearish, or bullish, for too long. Especially as a short-term trader, you have to be nimble to navigate this market profitably.

It pays to have both calls and puts in your portfolio, even if you don’t expect the best or worst.

That’s what traders call hedging — protecting your downside risk.

Not nearly enough investors think about doing this. They’re helpless to wherever the market takes their portfolio, and don’t actively protect themselves.

And as much as it pains me to say it, we’re clearly not out of the woods yet when it comes to COVID-19. Cases are back on the rise, and there’s evidence that the vaccines aren’t enough to completely stop the spread.

So today, I want to share the best way for you to profit from the risk of a surge in COVID-19 cases this fall…

The Most Vulnerable Stock to a Second Shutdown

This idea actually popped up in my unusual options activity scanner.

For new readers, I share unusual options activity every Monday to show you how the big money is trading. You can catch the latest one here

But instead of waiting till Monday to feature this trade, I wanted to show it to you today. Because it highlights the importance of hedging.

The activity was on American Airlines (NASDAQ: AAL).

A buyer purchased 2,800 put options on Monday and another 2,200 on Tuesday for the same option — the October 15, 2021 $20 puts. It totaled more than $800,000 on the line, which helped it show up on my unusual options scanner.

But when I saw it, I immediately thought it was the perfect hedge to the worrying headlines we’re seeing…

You know the ones. The ones saying the Delta variant of COVID-19 is as contagious as chickenpox.

That Australia is under a military-enforced lockdown…

The announcement that you can’t even go out to dinner in New York City this fall without proof of a vaccine…

Even private employers like Walmart and Disney are requiring vaccines now.

It seems like the overreach won’t end, as governments continue to use the pandemic to seize even more power.

All of this after President Biden declared “victory” over the virus…

Listen, I like to stay optimistic. And I’ll continue to share any bullish opportunities I come across.

Even in 2020, I couldn’t believe how things were unfolding.

But I’m also going to be prepared this time around, in case the unthinkable happens in back-to-back years.

And we can do that with the trade above, adding puts on a vulnerable stock.

A “No-Brainer” Hedge

American Airlines has been a clear winner from the reopening. It bottomed on May 22 and has since returned more than 115%.

But we can’t forget, passenger flights all but completely stopped when the virus took hold last year. Governments were forced to step in and bail out the airlines.

It would be a clear disaster for AAL if we shut down again.

Even just vaccine mandates for U.S. travel would be disastrous, as it would slow down ticket sales and complicate the process for flyers. Not to mention shaking confidence.

In short, the AAL trade makes perfect sense in this scenario.

That’s the key thing, though. It’s the perfect trade if the economy shuts down again.

If we somehow shake off these fears, the stock has more room to run higher.

But at the very least, it’s an excellent way to profit from the risk of the virus ramping up this fall. It’s a no-brainer trade to hedge your portfolio.

Over the next two months, it will be crucial to watch.

The October 15, 2021 $20 puts are still trading around $1.95 at writing. With two months before they expire, they’ll be your best bet at hedging against the risk of COVID-19 this time around.

Regards,

Chad Shoop CMT

Chad Shoop, CMT
Editor, Quick Hit Profits

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