I only recommend options on my subscription sites JubakAM.Com and JugglingWithKnives.com.
Over the weekend I recommended using natural gas stocks as a way to hedge the risk of a Russia/Ukraine conflict and ensuing sanctions against Russia. I recommended shares of ConocoPhillips (COP), Pioneer Natural Resources (PDX), Equinor (EQNR), and Cheniere Energy (LNG) as hedges since I think the stocks will go up if the natural gas hits the fan.
Today on those subscription sites I recommended two more hedges using emerging market ETFs. I’m reposting that recommendation here because I want to be clear exactly how risky I think the market is at the moment. You will get sa 20% off offer in your email box tomorrow if you want to subscribe to my JubakAM.com site. But here’s the post from that site today just FYI:
“When I posted over the weekend that coming increases in interest rates from the Federal Reserve and the possibility of soaring energy prices from a Russia/Ukraine conflict and the ensuring sanctions by Western allies against Russia constituted a double whammy on emerging market assets and developing economies. A strong dollar and higher U.S. interest rates would exacerbate a looming debt crisis (yes, yet again) in the developing world, and higher oil and natural gas prices (and tighter supplies) would hit developing economies really really hard.
I said then that I’d be looking for hedges to insure against and profit from the downside risk in emerging market assets.
Well, things have moved faster than I expected on the Russia/Ukraine front with the United States sending a token number of troops to Russia’s Baltic neighbors (exactly the move calculated to get Vladimir Putin’s attention) and with U.S. and Nato ships and jets moving to bases closer to the possible zone of conflict.
I still think the likely form of this conflict with be less than full-out war–regional proxy battles, cyber attacks, threats against more Ukrainian territory and further annexation–but every move raises the odds that someone will miscalculate.
Today as of 1 p.m. the iShares MSCI Brazil ETF (EWZ) was down 3.14% and the iShares MSCI Mexico ETF (EWW) was down 3.29%.
The action in the market for Put Options that are bets that prices will fall–since they give the holder the right to sell at the strike price of the put–however, was much, much heavier. The March 18 Put Option (EWZ220318P00028000) on the Brazil ETF EWZ with a strike price of 28 (the ETF was selling at $29.29) was up 30.85% as of 1 p.m. The March 18 Put Option (EWW220318P00045000)on the Mexico EWW with a strike pice of $45 (the ETF was selling at $47.47) was up 53.85% as of 1 p.m.
Why this date? The Fed’s March meeting is set for March 16 so I think this gives us the most exposure to fear ahead of that meeting.
Why those ETFs (and emerging markets)? My strategy in looking for hedges is to find assets leverage to changes in the big market trend but that also have their own fundamental stories that will drive prices in the direction of my trade.
Brazil’s economy is very dependent on exports, particularly of raw materials to China, and with the Chinese economy slowing Brazil is looking for some tough numbers on trade. And its hard to imagine a worse political situation than that faced by the Bolsonaro government.
Mexico looks to be facing a potential credit downgrade from Standard & Poor’s and Moody’s Investors Service on the new oil industry rules. That’s not a plus for an economy already struggling with the effects of one of the world’s worst Pandemics.
I will be adding both of these Puts to my Volatility Portfolio today.” You’ll find the Volatility Portfolio on my subscription sites JubakAM.com and JugglingWithKnives.com