How to Trade Hurricane Irma and Other Tropical Storms
The United States is faced with the prospect of a massive hurricane this weekend in Miami.
This will be the second tropical storm in less than four weeks. If hurricane Irma continues to build, it can hit Florida as a category five, or even category six storm with winds of 300 km/h.
As insurance companies begin tallying up the total damages from hurricane Harvey, they are facing the prospect of even more astronomical losses in the upcoming week.
How to Trade Hurricane Irma and Other Tropical Storms – Insurance Companies
There is a big difference between total cost of damages, and the cost that will actually be covered under insurance.
Flood insurance is not available for most residential properties, most water damage is absorbed by property owners.
In the United Stated, the National Flood Insurance Program (NFIP) offers coverage for select neighborhoods only. This insurance has to be purchased separately and can vary in price. Statistics show that only between 15% to 20% of homes in qualifying areas actually have a flood insurance policy.
Other than this limited coverage, most owners have no recourse in the case of a flood.
Who pockets this loss?
The homeowner, and you cannot speculate on this event.
However, this doesn’t mean that speculation does not happen on insurance companies and the industry. In fact, in these tropical storm events, most insurance companies are hit with large selling.
In fact, in 1926 a similar storm in Miami resulted in over $125 BN of insurable losses, which is massive!
You can profit by looking to buy put options and setup trades on any of these companies:
- Reinsurer Everest Re (NYSE:RE) fell nearly 7% on Hurricane Harvey
- XL Group (NYSE:XL) slumped 5.8%.
How to Trade Hurricane Irma and Other Tropical Storms – Cruise and Tourism Companies
In the event of a massive storm, most tourism and cruise companies operating in the area will suffer.
The decrease in demand results to a loss of sales and income. As a result, investors sell to get out of these stock companies, which leads to a further drop. This drop scares other investors and forces them to get out, causing it to drop even more. This cycle continues.
For Hurricane Irma, here are two cruise ship companies that operate out of the Caribbean:
- Royal Caribbean (NYSE:RCL)
- Carnival (NYSE:CCL)
How to Trade Hurricane Irma and Other Tropical Storms – Airline Companies
The airline industry is very similar as the cruise and tourism ones.
In a storm situation, they lose clients and cancel flights. This results in a decrease of sales, which leads to selling.
Airline companies have a very low profit margin on sales, which means they need volume to turn a profit.
This means even a short halt in their operations can make a big impact to their bottom line.
Here are a few airline companies you can trade puts on that operate in the south:
- American (NASDAQ:AAL),
- Delta (NYSE:DAL),
- Southwest (NYSE:LUV) and
- JetBlue (NASDAQ:JBLU)
How to Trade Hurricane Irma and Other Tropical Storms – Commodities
Another way to look for profitable trades is to study the storm area.
What is their main source of business and income?
In Florida, it is the orange juice industry. But isn’t it hard to trade orange juice?
Anything you can imagine trades in the futures market and allows you to take advantage of the volatility.
Here is an example of Orange Juice futures, making a 5.95% jump in just one day (symbol OJ1! on TradingView):
- when a storm threatens supply, this makes the price increase to compensate for the lack of availability
- commodities mostly increase in hurricanes due to shortages of supply
- companies which will have decreasing sales typically suffer as a general rule
How to Trade Hurricane Irma and Other Tropical Storms – Conclusion
When hurricanes and tropical storms hit, it causes a lot of damage to property and people’s lives.
The effects of Katrina are still felt today.
A lot of people lost their homes, their life savings and have still not recovered.
Hurricane Harvey and Hurricane Irma could have similar, or even worse effects.
I do not in any way wish for any of these events to occur to anyone in the world.
This is a very emotional time and I pray and wish for everyone’s safety.
However, as a trader it is also my job to make returns and take advantage of volatility and opportunity.
I would strongly suggest that anyone making profits from trading these events donates at least 20% to a charity that helps the relief efforts in the effected regions.
Pay it forward and try to do whatever you can in life to help a fellow brother or sister in need.
Good luck and good trading.
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The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.