How to trade epidemics

Even though I’m predominantly a Futures and Forex trader, that doesn’t mean I pay zero attention to what’s going on in the markets.

After all, I’ve said before that it’s crucial to pay attention to the way markets affect each other.

Now we’re sometimes going to see moves in other markets (and other equities markets) that we don’t necessarily have a Futures contract to trade…

Does that mean we just ignore it and move on.

Not a chance, Gang.

Here’s what we could do in a situation like that (which we happen to be experiencing right now)…

We can take some kind of analysis that we do in the Dow, for example, and apply it to the DAX in the EWG. (Now you can Google and find a pretty helpful PDF straight from iShares.com to shed some more light on the iShares from different countries, Gang.)

Why might this be helpful? Or when might a situation arise like this?

How about right now — with the Coronavirus.

I’ve had plenty of traders ask me, “Ragh how do we trade country ETFs when there’s an epidemic that people fear may continue to develop into a pandemic?”

STEP ONE: The Coronavirus V. Country ETFs

So what does the Coronavirus mean to other economies and country ETFs, Gang?

After all, just the other day we heard Canda talk about how their economy will be impacted. As did Japan.

And if that’s the case… where could we focus as traders?

To find this answer let’s start somewhere super simple…

STEP TWO: Proximity to China

The epicenter of this virus is China. So let’s think about this logically. We could start by looking at China, itself. We could start by looking at economies that are directly affected by China. We could start by looking at economies that are geographically near China.

So let’s start there, Gang.

Geographic proximity while being a strong trading partner.

Who does that immeditably bring up? Who is relatively close to China and is a massive trading partner?

Australia and New Zealand are my first thoughts.

So in a lot of cases, most especially in Australia and New Zealand, I’ve been short their currency via Futures and Forex. Since the Corona outbreak, I saw the movement clearly, and it was probably some of the easier action to trade. Even in relation to Crude or Cooper, as they made a bit of a reversal rather than a continuation of the downtrend.

Obviously those two were the bigger names I initially thought of… but other geographical, trading partners such as Indonesia, Malaysia, Japan, and Germany could be looked at.

STEP THREE: Hong Kong iShares a.k.a. EWH

So once we’ve thought about the background information of just who is close to China and trades heavily with them, we can Google that awesome iShares PDF, look up those countries abbreviations, and head over to the charts.

Now yesterday we did this exact process…

And when we headed over to the charts, the one that triggered was actually Hong Kong (EWH).

So we placed a trade on via puts (and as always, sent out an alert to the Futures Room. If you’d like in on those alerts, you can join here.)

But here’s a basic idea of what we did…

We bought the March 20 puts at the 24 strike. Why the 24 strike? Because that put us at the money, and at the time, it was trading between 55 and 65 cents with a 10 pip spread. We could’ve gone with 60 cents, and been filled, or sit at 55 (which I believe would’ve been unfilled). But later on in the day it was trading at about 62 cents.

So we were able to take advantage of that move higher right into a great zone of resistance. 

Trades like this are especially effective when you have a futures trading outlook, and you realize that there might be alternatives to the indices.

That’s what’s so great about ETFs.

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