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Hotel Stocks Present a Bearish Opportunity

Last Friday, I recommended a bearish put option on a casino stock, and today I am recommending a bearish trade on Extended Stay America, Inc. (NASDAQ:STAY), the North American hotel owner and operator.

As I said last week, I don’t think we have seen the worst of the coronavirus yet. Until the situation is under control, traders and investors should avoid bullish positions in travel-related company, including hotels.

Despite the fact that STAY’s only international operations are in Canada, the stock has already started to struggle during the outbreak-related bearishness.

What’s Facing the Market this Week?

The biggest story this week is the coronavirus. The death count in China has risen to nearly 400 people, and as of yesterday, over 17,000 people have been affected.

China’s markets have also reopened after a break for the New Year holiday, and shares on the Shanghai Composite have dropped.

The virus is also starting to affect U.S.-China relations. Chinese officials have criticized other international travel restrictions, and China’s Foreign Ministry accused the U.S. of helping spread fear.

Ordinarily, this may not be a big deal, but because U.S.-China trade negotiations are ongoing, we have to watch how the countries communicate with one another.

We also have the Iowa caucus today, which will determine which Democratic presidential nominee gets an early lead. Self-avowed democratic socialist Bernie Sanders is favored in the polls.

Early wins in Iowa can give a candidate more momentum, enabling them to win other primaries, but it’s still too early to know the outcome of the primary election.

That may not stop investors from reacting poorly though, pulling out of weak stocks like STAY. Regardless of your politics, the market doesn’t like the idea of a Sanders presidency.

Struggling Since the Virus Started Spreading

The coronavirus situation started to affect the market when international cases were reported in mid-January. As more U.S. cases popped up, the market started falling further.

In the chart below, you can see that STAY broke below support in the $13-$13.50 range last week. STAY doesn’t have any longer-term support levels to keep it from falling further.

Daily Chart of Extended Stay America, Inc. (STAY) — Chart Source: TradingView

The stock hit $12.50 during intraday trading in August, and I suspect that is the level the stock will try to find support at. With a $12.50 strike price put option, investors can set themselves up to profit from STAY’s continuing pullback.

Buy to open the Extended Stay America, Inc. (STAY) April 17th $12.50 Puts (STAY200417P00012500) at $0.60 or lower.

InvestorPlace advisor Ken Trester also brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.

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