By Stockpickr Staff
Posted at 11: 55 a.m. EDT on May 4, 2009


Over the past week, as the World Health Organization has warned of possible global pandemic related to the current H1N1, or swine flu, outbreak, Mexican-related stocks and the Mexican stock market in general have sold off extremely hard.

Take, for example, iShares MSCI Mexico (EWW), which is down as much as 95 to 10% last week. Investors were panicking and dumping everything related to Mexico in fears of a possible economic and financial slowdown.

Recent tallies report close to 1,000 cases in 20 countries, 225 of which are in the U.S. There have been 26 H1N1-related deaths in Mexico and one H1N1-related death in the U.S.

Traders have been trying to game speculative swine flu stocks such as BioCryst Pharmaceuticals (BCRX), in phase I testing of a potential flu vaccine, and Novavax (NVAX), another vaccine company in early phase I and phase II testing, as well as pork producer Smithfield Foods (SFD).

How else can you trade the swine flu, with an emphasis on Mexican stocks?

Keep an eye on the iShares MSCI Mexico ETF, which really is the purest play on Mexico, and it offers diverse exposures to several essential industries. The EWW’s largest holding is America Movil (AMX) which makes up 24.93% of the fund's weighting. Telefonos de Mexico (TMX) makes up 6.75%, and Wal-Mart de Mexico, which is not publicly traded in the U.S. but is about 31% owned by Wal-Mart (WMT), makes up 5.88%.

Overall, the ETF is weighted heavily toward the telecommunications sector, which represents 41.7% of the fund’s total assets. The financial services and consumer goods sector represent 12.96% and 12.47%, respectively.

Next time the iShares MSCI Mexico ETF opens down 3% to 5% related to swine flu concerns, consider shorting puts on the ETF that are two strikes down in the options chain.

For argument sake, let’s say the EWW closes directly at $30 on a given day, but due to swine-flu-related news, it gaps lower by 5%. The idea here with the index at $28.50 would be to short naked puts either at the $27.50 or $25 strike and to profit off of the decline.

As investors' fear and panic peak, an option seller would be able to capture the increased volatility in the put premiums, thus profiting off of the panic. Moreover, if the index does fall into the $27.50-to-$25 range, you can go long the actual common stock and sell upside calls as another hedge on the position.

Another interesting play here is Telefonos de Mexico, mentioned above as part of the EWW ETF. Recently, Telefonos, which operates as one of the largest long-distance phone carriers in Central and South America, said that telephone calls have actually increased dramatically over the past week and a half, due to Mexican concern for friends and family members. Increased calls equates to increased sales and a potentially higher stock price.

Shares of Telefonos de Mexico have traded in a 52-week range of $42.94 to $12.54 and are currently trading at about $16.78. Telefonos sports gross margins of 48% for the quarter, compared with an industry average of 47.56%. Operating margins for the firm are 32.02%, which is substantially higher than the 3.8% industry wide average.

Grupo Televisa (TV) was hit hard last week, falling about 8% on Monday, April 27, and closing down more than 3% for the week. Since then, this Mexican broadcasting company has actually rallied into positive territory, trading up about 4.3% at midday on Monday, May 4, to $16.44. The trade here is, on any swine-flu-related selloff, to short the out-of-the-money puts as well.