Profiting from Pandemic Panic

I don't want to sound insensitive and I can't predict the future but as of right now things don't add up. All financial journalism was focusing on the supposed "swine flu" pandemic possibility after 100 people in Mexico died and we have some reported cases in the US and abroad. Let's think about this logically for a minute. During the normal flu season, there are 36,000 deaths, does this cause a panic? No. This strain of Influenza A, which has caused deaths in Mexico where they likely have much less preventative vaccines and had direct contact with pigs have had 149 deaths. All the cases in the US have been mild and people have made full recoveries. Is this cause for panic? The media loves it, and again it may turn into something more severe but I highly doubt it and for people's health I hope it doesn't.

Because I thought this was completely overblown I thought about ways to profit from the exaggeration. Imagine it as a bubble but very short term. There were small biotech companies doubling in value because of this so I thought it would be a profitable idea to fade their rallies. I decided to sell calls on one company and the company would currently have to double again to even hit the strike price I sold. I had to sell June paper as that was the only option but if the stock collapses back down as I suspect I'll buy them back for cheap and close the trade.

Airlines got killed today, and normally I would not go out and be long an airline however one airline in particular seemed like a much safer play. Jet Blue is near relative highs and has very defined support and resistance. Unfortunately I got in too early and could have gotten quite a bit more premium but the window of opportunity was only about 10 mins. I sold puts near support. I sold puts because I figured it would snap back but if it didn't I don't mind owning the company as it is one of the few airlines doing well and has some sound fundamentals.

Both of these plays are working out so far. The concern I have is more of the fact that we could be setting up for more downside. The BKX is close to breaking a support level which would signal further downside. US Steel reported after the bell and missed badly showing that materials demand is still soft at least for steel in the US which could weigh on materials. This could give me my opportunities to get in but if there will be further downside I must be cautious. With the fed meeting coming up I'll likely wait to do anything unless I see some opportunities where I think things are getting over done to the upside or downside. There are some great looking entry points but it is hard to buy dips with the idea of more downside risk. I still think there is the possibility of bullish surprise to GDP but that has yet to be seen and we have to get through the fed meeting first. We did work off some of our overbought levels today a bit more and if we happen to have a large down day it would be a good opportunity to take lower risk long positions. For now I'll be patient and see what the market does. Futures are pointing lower right now.

Total Return for 2009: 130%