Monday, December 21, 2020
Derivatives Idea: COVID 19 Vaccine Play - 13 Month McKesson Accumulator
By Century Financial in 'Investment Insights'
*This performance is only observed with historical backtests and not traded by the company.
Risks & Assumptions
Structure Rationale
With major US Pharma companies on the verge of delivering first dosage of vaccine, all attention now focuses towards the next step of the vaccine delivery – storage & distribution i.e. the logistical part. Pfizer recently administered its first vaccine dosage in UK & US with more countries gearing up for the final vaccine launch. Other major developed & emerging market countries are likely to order sizeable amount of vaccine dosages in order to meet burgeoning demand for their population’s vaccine injection requirement.
With this move, stocks in distribution, storage & logistics industry like McKesson ($ MCK) are likely to see increased investor demand. The company recently announced that it will extend its existing partnership with US CDC in order to help in Operation Warp Speed. With this, the company is likely to become one of the major centralized distributors for COVID 19 vaccines & other associated delivery kits. On the earnings side, the company has trailing 4 quarter earnings surprise of 13.4 %. The company currently has 117 distribution centers & supplies more than 150,000 items to end users like hospitals, pharmacies, clinics, and doctor's office.
Structure View
The structure is designed to have a strong bullish view on the underlying stock McKesson. In a worst case scenario at the time of expiry, if the McKesson share price drops below the respective put sell strikes, the investor will be required to take delivery at the corresponding strikes.
Structure Design
The structure is constructed by holding a long position in the underlying stock as well as simultaneously selling 3 put options at lower strikes. The structure exposure size is based on 1 lot of underlying share for all legs (1 Lot = 100 units).
Advantages over Normal Stock Buy & Hold Position
Accumulator Comparison over Normal Stock Buy & Hold Position
As seen from the above image, in case McKesson share price drop below the CMP, the structure will potentially aim to give average coupons of 12.83 % till the lower barrier strike price of $ 122. In a scenario where prices rally above the CMP, the structure potentially looks to give not only current share price gains but also the coupon gains. In a worst-case scenario when prices drop below the put strike prices at the time of expiry, the investor would be required to take delivery of the share at the corresponding strike price.
Structure Payoff & Statistics
13 Month McKesson Accumulator Payoff
13 Month McKesson Accumulator Statistics
Risks & Assumptions
Data Source: Bloomberg
Arun Leslie John
Chief Market Analyst
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