The ongoing outbreak of the deadly bird flu H7N9 in eastern Asia is making some waves on Wall Street. As investors attempt to pick winners and losers from the recent flare-up, some companies are receiving a boost while others are stumbling. Fellow InvestorPlace contributor James Brumley recently chimed in on the subject, identifying a handful of companies poised to gain or lose from the news.
Let’s take a look at the list and see if any of them are providing alluring option plays.
The two potential winners are, not surprisingly, drug companies best positioned to provide vaccinations to treat this particular flu strain. First, we have small-cap BioCryst Pharmaceuticals (NASDAQ:BCRX), currently trading at $1.66. In light of its volatility, it definitely falls into the “higher risk, higher reward” category. It does have listed options, but its share price is cheap enough to make buying them unnecessary. Heck, at $1.66, its stock is effectively a call option all by itself. Bottom line — if you’re interested in bullish exposure to BCRX, just buy the stock.
The second stock on the winners list is the larger, more established GlaxoSmithKline (NYSE:GSK). With GSK in the midst of a longer-term uptrend and recently breaking out to a new multiyear high, its price chart has a lot more going for it than BCRX. What’s more, because it trades over 2 million shares on average per day, its options boast plenty of liquidity.
Click to Enlarge The recent boost in its share price has helped drive implied volatility to the upper end of its two-year range. With options priced a bit rich right now, buying a call spread is likely a better play than buying call options outright.
If you’re comfortable betting GSK will rise above $49 by May expiration, buy the May 47-49 call spread for $1.20 or better. The max risk is limited to the initial $1.20; the max reward is the distance between strikes minus the net debit, or 80 cents.
On the losing side of the equation lies the Chinese economy — meaning stocks like iShares FTSE China 25 Index (NYSE:FXI), Yum Brands (NYSE:YUM), and airliners like China Southern Airlines (NYSE:ZNH) and China Eastern Airlines (NYSE:CEA). The last two are very thinly traded, and although ZNH offers options, they lack sufficient volume to seriously consider playing. Of the remaining two, FXI offers the most alluring setup for some type of bearish bet. (YUM’s price chart has been a mess of late, making it difficult to identify the trend, let alone a low-risk entry point.)
Click to Enlarge To exploit a continuation of FXI’s downtrend, you could purchase the June 37-35 put spread for 85 cents. The max risk is limited to the initial 85 cents paid and will be incurred if FXI is above $37 at June expiration. The max reward is the distance between strikes minus the net debit, or $1.15 and will be captured if FXI is below $35 at expiration.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.