In the wake of the Coronovirus Biotech and Pharma shot up immensely and I am yet to find a person to tell me why. First off only a couple of companies will benefit from finding the most efficient test/cure for COVIT 19. Even if they do, unless we will have a new string of COVIT19 every year this will be a one-time effect on their valuation. Most likely only in the country that they are located in because good luck getting a patent on a vaccine for it. So what is left imho is, that making significant progress towards a COVIT19 solution is seen as a Signaling tool for companies, but it's a bad one, because it's cheap. Everytime a CEO goes on the news and talks about the research on they do on COVIt the stock soars up at least 5%, but they don't have to prove anything. For all we know there might be a team of two ppl working on it. Let's say in the end two companies are able to claim patents for a vaccine and a test and they sell it to the rest of the world. The expectations for the other companies should come crashing down and thus will be priced out. That's why I'm inclined to identify and short Biotech and Pharma ETFs that are comprised of companies that shot up in the wake of COVIT19 in late of FEB. Woul'd like to hear your thoughts on it, maybe someone with a better understanding than me on the workings within the Pharma/Biotech Industry
By selling puts far out of the money I'm rather bearish and bullish at the same time, a position would typically have a delta of 3 or less.
I think your underlying thinking is sound. Vaccines never make much for the company making them, and especially now the pressure on the companies that make them to keep them affordable will be extreme to the point that countries including the U.S. could just nationalize/use some kind of defense production act on the company to get the drugs, something that would have been unthinkable a couple months ago. If anything the number of people who can afford health care to buy all the other drugs out there will be impacted by a big recession same as the general economy. The only problem would be that the delta isn't so great between the biotech ETFs and the S&P, and if you wanted to sell a biotech short in some manner and go long S&P you'd tie up twice the capital. For example, the ETF that's held up best in the last 3 months looks like BBH, which is down 8% vice 22% for the S&P 500. So assuming they end up at about the same P/L at the end of the day, you've got a 14% delta to play with and if you went long/short that really cuts your return on equity down to 7%. The question is if the risk adjusted return is there given that you're somewhat capping your returns. Of course if you're just choosing whether to short the S&P 500 or short BBH, it does seem that the BBH short choice would make sense (assuming minimal borrow costs).