Nearly all students thank god for Hurricane Sandy as it means they can party in the blackout for two days but for Wall St. time is money. Stock traders are itching to trade but option traders are taking a hit in the wallet as markets stays closed for a second day. An option has an expiration date, and as the market stays closed the option loses time value, especially with weekly options. Weekly options only have a five day lifespan and taking two days away from that will mean that they will lose 40% of their option value. This will benefit the sellers of the options as the likelihood of the option will expire out of the money.
The NYSE is said to be prepared to open on Wednesday. The timing here is auspicious because the job report is out on Friday and the US elections are approaching. Both of these are two big market moving events. There will also be a huge order imbalance causing choppiness in trading as bulk orders stack up over the weekend.
Trading volume has been low, unaffected exchanges in the US remain closed because the NYSE and other markets worldwide have been conservative with their positions as Hurricane Sandy is still in affected and data on damage still needs to be measured. The loss in business activity will be a short term blow to the American economy.
Once the market opens, we can expect to see insurance stocks dip as they will have to pay off insurance contracts. It will seem like shorting them will be a no brainer. If you are planning to react to the price movement, I suggest you think again. One recent academic study by Utah State University examines Hurricanes Katrina and Rita, looking at attempts to short sell insurance companies. These companies typically need to pay out claims in the wake a storm, and the events can hurt their bottom line, providing bearish investors with a profit opportunity. Because of the complexity involved, short selling is a relatively rare tactic for individual investors to employ. Many consider it mostly the province of professionals like hedge funds and Wall Street trading desks. The findings: investors did time short sales to Hurricane Katrina, but they were late to the game. In fact, short selling didn’t spike until three trading days after Hurricane Katrina’s landfall, when stock prices had already fallen.
When Hurricane Rita appeared about a month later, investors were faster on the draw, with a spike in short selling of insurance stocks starting in the week before landfall. Even then, however, trading seemed somewhat indiscriminate, with investors failing to concentrate on insurers that had Gulf Coast exposure.
Of course, while Katrina has become synonymous with devastation, particularly for New Orleans, Rita seems destined to be a footnote in history. So in retrospect, those moves look less like prescience and more like bandwagon jumping.
To be sure, it can be difficult to predict investors’ intentions from looking at aggregate trading data. Blau points out that it is impossible to tell for sure whether any particular bet was profitable for the person who made it.
Still, investors planning to bet on a hunch about Hurricane Sandy don’t seem to have history on their side. Not that will stop them.