Traders have a unique perspective of the world, almost a dual personality. With every news event, most traders have two reactions:
- How does this impact me/my family/my friends/my life?
- How can I profit from it?
I touched on this idea before when it comes to the coronavirus. I don't believe anyone should be rooting on a pandemic and death to make money or strengthen their belief in their political opinion, but life is what it is for traders, so while we may not like what's happening around us or secretly hope things get worse, we still have to manage our trading.
Simply put: you play the hand you're dealt.
Right now, that hand includes the coronavirus, and traders are betting aggressively early in the round. Take a look at some of the gains today on big winners from Wednesday's trade as coronavirus-related plays.
What you'll find in this list is a lot of small biotechs that have issued press releases or been linked to working on a treatment or cure for the coronavirus. Additionally, there are a couple of Chinese online learning companies, a China health insurance company, shelf-stable food company, and makers of face masks.
Check out just a few of the year-to-date moves coming into Thursday on companies you've never heard of before the last week or two:
Alpha Pro Tech (APT) (maker of facemasks) +261%
Co-Diagonostics (CODX) (test kit) +894%
Tarena Intl (TEDU) (online learning) +95%
Moderna (MRNA) (biotech) +49%
Vaxart (VXRT) (biotech) +371%
Vir Biotech (VIR) (biotech) +178%
Novavax (NVAX) (biotech) +132%
NanoViricides (NNVC) (biotech) +265%
The folks in these names are participating in the age-old Greater Fool Theory trading strategy. Outside of an epic short-squeeze, this is a huge risk and absolutely huge reward method, but it's important to understand most of the names are trading on hype and hope. One year from now, probably sooner than they, I would wager every name except one on this list is lower. Significantly lower. That face does not mean a top is in any of these names yet. It's is important to understand that if you are buying today, you are banking on the fact that another momentum trader will pay you more for those shares in a few hours, a few days, or even a few weeks, but no one is buying these names as investments or long-term holdings outside of maybe Gilead Sciences (GILD) .
For all the 50%, 75%, and 100% we've seen and still might see on these names, there are going to be an ample amount of -20%, -40%, and -50% days in the near future. Those with the losses will be crowned the fool.
I'm not advocating against trading these. Heck, I'll trade a stock that deals with salvaging the hoards of squirrels if I think I can make money on it, but if you are in the space, please understand the risk. Leaving your desk to do something as simple as using the restroom could result in a price that is 10% or 20% changed by the time you return, possibly to your benefit and possibly not. When the reversal of reality does it, it will hit hard and it will hit fast. The challenge becomes whether it occurs here or 200% higher from here.
Only a few names have options, so there's not a lot you can do to protect yourself, but those options are telling. For instance, Alpha Pro Tech current has an ask of $0.70 on the March 20, $7.50 puts. Those are puts that expire in 22 days and sit more than $12 (61%) OUT-of-the-money. The April $5 puts are asking $0.45. The March 20 $20 straddle is pricing in a move of 68% over the next 22 days.
All I'm saying is be careful out there and good luck if you are involved in these names. I hope they treat you well!
