Tencent Music Can Thrive Despite Coronavirus. How to Play It With Stock Options.

Photograph by Michael Nagle/Bloomberg

Somewhere in China someone is holed up in their apartment playing games, listening to music, ordering stuff, and waiting for the coronavirus to go away.

Just how many people are hunkered down to avoid the virus is hard to gauge, but it might be enough people to benefit online companies like Tencent Music Entertainment (ticker: TME).

While the stock has recovered from some of the Wuhan weakness, at just under $14 a share it’s still trading toward the bottom of the past year’s price range. Investors are clearly waiting for more information to decide if the virus has ceased to be a major detriment to China’s economy and consumer spending patterns.

An answer could come as early as mid-March when the music platform operator is expected to report fourth-quarter earnings. The report creates a trading opportunity for aggressive investors who are comfortable with the risk of trying to predict the outcome to a health pandemic.

The thesis is simple, but risky, too.

Wall Street’s banks are starting to tell investors that the Wuhan virus is not the personification of a fearsome Black Swan that will destroy the U.S. stock market’s historic rally. This column has repeatedly asserted the same point almost from the moment the virus became a market factor, encouraging investors to consider bullish positions in Alibaba Group Holding (BABA), and exchange-traded funds like the iShares MSCI Emerging Markets ETF (EEM) that offer broad exposure to Asia’s markets.

If Tencent Music, which went public in December 2018, reports decent earnings, and the management team says something about how the Wuhan coronavirus is not expected to have a material impact on earnings—and mighty even have helped boost the business—the stock should trade higher. Initial reports indicate online usage has increased since the Lunar New Year.

“At a high level, the…outbreak should have a negative impact on sectors that require unnecessary face-to-face contact and benefit sectors that reduce such contact, as people try to protect themselves by isolating from strangers,” Jason Helfstein, an Oppenheimer analyst, recently wrote in a note to his clients. “As a result, people are spending more time at home and online. According to Aurora Mobile, time spent on mobile apps during 2020 Lunar New Year holidays increased 26% sequentially, vs. being flat in 2019.”

Should this prove true, Tencent Music’s stock is likely to build upon its year-to-date gain of 16%.

If this setup appeals, investors can buy Tencent Music’s April $14 call for 80 cents when the stock was at $13.62.

This positions investors to participate in any stock rallies above $14.80 (the breakeven price is determined by adding the strike price and the call price). If the stock is at $20 at expiration, a price that is just above Tencent Music’s 52-week high, the call is worth $6. During the past 52 weeks, the stock has ranged from $11.27 to $19.97.

Michael Schwartz, Oppenheimer‘s chief options strategist, said clients are increasingly asking how they can create positions that take advantage of the fear around the Wuhan virus.

Says Schwartz: “This is one of the situations where a well-placed call or put can help define risk and potentially maximize reward.”

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