Profiting from Hurricane Sandy

Mark Gimein has a short post on Bloomberg, explaining that a typical investor doesn’t really have a chance to profit on Hurricane Sandy:

Another way to take advantage of the downside risk might be to put buy put options on the S&P 500 index. If a lot of folks were doing that, you might expect November put options with a strike price of 1350 or 1375 — that would represent a three or four percent decline in the S&P 500 — to spike upwards. They haven’t.

Recent years have been blockbusters for catastrophically deadly and expensive extreme weather events; Munich Re has some very useful data on this, which show 2011 as a record-setting year for costs of natural disasters (this includes Japan’s Tohoku quake). While a lot of ink has been spilled about the possibility of hedge funds betting on high-impact, low-but-meaningful-probability events like the storm, that’s easier said than done. It’s possible to make a fairly general bet against the insurance industry, or to bet on a sharp drop in the markets.

In practice, however, making a specific bet that would hedge against — or profit from — a weather disaster, is a lot more difficult. There’s not a substantial market for, say, put options on the insurance companies with exposure to Sandy.

If you want to hedge the financial risks of a hurricane, there are not a lot of market tools at your disposal. The main hurricane option for investors, whether ordinary stock pickers or hedge fund traders is the same as for other New Yorkers: shut the windows, turn on the news, and watch the storm’s progress on TV.

Not mentioned: even if you wanted to trade stocks or options, the entire stock market (NYSE, NASDAQ) is closed today and tomorrow. Good luck with that.

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