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This week: The Options Trade; Back to School and COVID-19; Virus Immunity; Reading List.
The Options Trade
As reported by several analysts, activity in the options market picked up significantly in the late part of August and contributed to the melt-up and now the decline in the Nasdaq and its bellwether names. It is believed that this trade was placed by large players such as the Japanese giant Softbank, and by smaller institutions and individual investors.
The trade as described here was to buy and sell January calls with different strike prices. Done in size, these positions together would yield a significant profit at maturity with the caveat that big moves in the underlying stocks in the interim could result in painful losses, if these losses were marked to market. With this month’s sharp correction, some players large and small could see margin calls that will force them to liquidate and mark to market before January. In an extreme scenario, this could lead in theory to some players suffering big losses or being wiped out. When we see the actual math, we will pass it on.
Meanwhile, because it is known that this trade is in place in size, the market will do what it always does, which is to act in a way that maximizes the number of fools at any given time. In so doing, it will likely continue its swoon until the news of trouble at this or that institution percolates to the financial news media.
Given the tightness of the presidential race, the market will probably move sideways or down until Election Day, following which it would act in the way we discussed in the Briefs three weeks ago.
Back to School and COVID-19
There is excitement in the air as children return to school and (some) adults return to offices. There is also apprehension at the measures put in place to contain the spread of the virus. The big question of the season is the following: will the re-opening of schools and/or the cooling of the weather result in a new wave of coronavirus cases?
As things stand today, the number of cases and of deaths in the United States, while still elevated, have been trending down for six weeks (cases) and three weeks (deaths). The big summer spikes in Arizona, Florida and Texas have nearly deflated (with Texas a bit of a laggard) and the attention is now shifting to other states and also to Europe where cases have been moving up. It is encouraging to see that the nationwide positivity rate in the US is now about 5% for the first time since mid-June when the number of daily tests was around 500,000 compared to 750,000 today.
New York State and City are starting the season in good form with less than 1% positivity rate and daily deaths in the single digits (fewer than five in most recent days). One reason for this success is that New York is running as many as 100,000 tests on some days and more than 10% of all tests run nationwide. Another reason is more speculative and could be that New York City may have achieved some level of immunity because its crisis was so severe in the spring. We will soon find out.
Current consensus holds that we will get past this pandemic when we achieve general population immunity, be it through herd immunity or through immunization with a vaccine. While it is assumed by a majority that a vaccine will come first, some people hold the view that herd immunity will be advanced enough in the next few weeks that there may not be anyone left in need of the vaccine when it is finally approved. It is a provocative point of view but not necessarily one that should be dismissed outright. Among its proponents are a Swedish physician who treated scores of COVID-19 patients and a Portuguese Professor of Mathematics who models pandemics and herd immunity.
On the other hand, the much more visible Washington-based IHME sees, in a base case scenario, a doubling of total US deaths between now and the end of the year from approximately 200,000 to 400,000. See their three scenarios here.
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