By Scott H. Fullman
While politicians try to tamp down Ebola panic (or provoke just
enough panic to help their election chances), Americans are worried
an Ebola epidemic could spread across the nation. Fear of the virus
is so high that it was even blamed for driving down the stock
market last Wednesday. Off Wall Street, reports indicate people are
nervous about shopping in local stores, much less getting on an
airplane.
Already, some opportunists are trying to cash in on the fear.
Rapper Cam'ron released an Ebola mask with a picture of himself on
it, and claims to have already sold more than 3,000 at $19.99.
Others are buying actual hazmat suits and flipping them for a
profit.
The reality, of course, is that while Ebola is ravaging Africa
it remains a minuscule threat in the United States. A joke making
the rounds neatly puts the danger in perspective: More Americans
have been married to Kim Kardashian than have died of Ebola. The
flu, meanwhile, is expected to kill 20,000 Americans this year.
In the market, irrational fear causes irrational selling, which
creates opportunity for level-headed investors. Two trades in FedEx
(ticker: FDX) and United Parcel Service ( UPS) allow investors a
way to wager on this irrational fear, as well as expectations that
recent shipping data are a precursor to strong holiday sales.
If the Ebola virus sparks mass fear, online shopping may surge.
UPS and FedEx, already anticipating higher demand based on last
year's volumes, are hiring seasonal delivery people.
Last week UPS reported that third-quarter earnings rose 13.8% as
global shipments increased 6.9%. The company is expecting a
double-digit surge in holiday shipments.
Yet, as the stock has rallied higher, trading a few dollars
below its 52-week high of $105.37, option risk premiums have
declined. Implied volatility, which is the measurement of assumed
risk in options for the next 30-days, dropped from a 52-week high
of 24.22 set Oct. 15 to a recent 13.63, closer to the lower end of
the range. This indicates UPS options are relatively cheap compared
to where they were 18 days ago.
Investors can buy UPS December $100 calls for $3.50. If the
stock surges from a recent $103 to $113, the call is worth $13.
Should the stock decline below the strike price, the money spent on
the call is lost. However, risk is limited to the price paid for
the call, which equals 3.4% of $103.
Investors also can consider buying FedEx's $167.50 calls that
expire Dec. 5, 2014, for $3.14. If the stock surges from a recent
$168 to $184, the call is worth $16.50. Should the stock fail to
rise above the strike price, the money spent on the call is lost.
However, the risk is limited to the price paid for the call, or
1.9% of the stock price.
Remember: When fear strikes, there are people who will seek to
profit, and some companies will benefit from those efforts. Nimble
investors can find low capital risk opportunities that offer a high
return potential for a short period of time.
Scott H. Fullman, CMT, is founder and chief strategist of
Increasing Alpha, and author of two books on options strategies and
technical analysis.
Comments? E-mail us at editors@barrons.com
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