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This PayPal Options Move Is Better Than Cash

Posted May 8, 2020 at 10:20 am
Steven M. Sears
Barron's

A historic exodus from risky financial markets to the safety of the sidelines has defined the past eight weeks.

As Covid-19 infected the world and shut down economies with stunning speed, investors moved about $1 trillion into conservative money-market funds , raising the total to $4.7 trillion, UBS Global Wealth Management wrote in a recent client note.

The rush into money-market funds is about double what happened during the financial crisis. Back then, such funds increased by less than $500 billion, which superficially suggests that investors are twice as scared of Covid-19.

Yet the stock market has rallied higher from the Covid-19 lows, even though many investors are worried that a second severe selloff could emerge for reasons ranging from a stronger, second wave of the pandemic to fears that the economy will take far longer to heal than many now anticipate.

Those concerns help explain why people are seeking safety in money-market funds even if they are realizing negative returns (just a little inflation will wipe out any gains). Most people probably don’t even think that way. Instead, they see money-market funds, even if rates are often 0.06% or less, as offering them safety when unemployment is historically high and there is no transparency into the next stage of the pandemic.

Warren Buffett, who clearly understands how to evaluate risk and reward, is ominously among the investors huddled on the sidelines of the financial markets. He recently revealed that Berkshire Hathaway (https://www.barrons.com/quote/BRK.B, ticker: BRK.A), where he is chairman and CEO, isn’t rushing to buy anything, though it has more than $130 billion in cash and has done so in past crises. Many investors interpret that as a sign to be very cautious.

Nevertheless, Mark Haefele, chief investment officer of UBS Global Wealth Management, contends that there are better alternatives to cash.

Haefele advises clients to be selective stock buyers and look for opportunities in U.S. investment-grade and high-yield bonds that appear to be pricing in a more pessimistic outlook than equities.

To tiptoe back into equities, Haefele recommends that clients sell put options to build up long-term stock positions. This column has long championed using that strategy to position yourself to buy blue-chip stocks on pullbacks, provided the stock can be held for a few years, enough time for the current volatility to ebb. (Put options give buyers the right to sell a stock at a set price and time.)

Haefele favors focusing on themes, ranging from genetic therapies to e-commerce, that benefit if Covid-19 accelerates.

While he didn’t offer investment picks, many investors are of a like mind. Pfizer (PFE), Gilead Sciences (GILD), and Regeneron Pharmaceuticals (REGN) have all attracted significant options flow as investors wager on the outcomes of their drug research.

PayPal Holdings (PYPL), which is widely used by consumers to electronically transfer money to each other and even to companies, has emerged as an indisputable Covid-19 winner.

The company reported earnings late Wednesday and zoomed 14% higher on Thursday despite disappointing results . It’s hard to deny PayPal’s utility in this changed world.

With the stock at $146.29, investors who want to buy shares can sell the August $130 put for $5.80. If the stock is above the strike price at expiration, investors can keep the premium. Should the stock be below the put strike price at expiration, investors are obligated to buy the stock or cover the put at a higher price.

During the past 52 weeks, PayPal stock has ranged from $82.07 to $147.20. Shares are up 35.2% so far this year.

Originally Posted on May 7, 2020 – This PayPal Options Move Is Better Than Cash

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Disclosure: Options Trading

Options involve risk and are not suitable for all investors. Multiple leg strategies, including spreads, will incur multiple commission charges. For more information read the "Characteristics and Risks of Standardized Options" also known as the options disclosure document (ODD) or visit ibkr.com/occ

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