Property insurance companies like

Allstate

(ALL) - Get Allstate Corporation Report

,

Travelers

(TRV) - Get Travelers Companies, Inc. Report

, and

Hartford Financial

(HIG) - Get Hartford Financial Services Group, Inc. (HIG) Report

all fell about 3% on Thursday as it became more likely that hurricane Irene would reach the northeast with enough strength to cause flooding and other damage. Options implied volatilities also moved higher, reflecting investor concern that insurance companies would face severe losses if Irene proved to have a serious impact.

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Hurricane Irene

Source: NOAA

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Recent data from the National Weather Service puts the odds of hurricane force winds (> 74 mph) in the New York area at less than 10%. Of course, flooding is possible, and while I think the worry about insurers is probably a good buy setup for the shares, a trade I like even better is to sell some volatility.

The scattershot approach is tempting, but I think a more precise thesis is to look at options on Chubb (CB) - Get Chubb Limited Report. Chubb Personal Insurance provides coverage for "fine homes," and many of those "distinctive properties" are in or around the New York area. In a report on Thursday, an analyst at Morgan Stanley noted that CB had the greatest exposure to the region, ahead of ALL and TRV. If we are operating on the thesis that any damage caused by Irene in the New York area will not be more extensive than CB is prepared for, we can expect short-term implied volatility to decline once the storm has passed.

During normal trading, this is a stock with a one-month volatility of 15%-20%. Price action recently has been on the order of 50% annualized, but I expect that number to come back down. With near-term options priced in the high $40s, we can buy a calendar spread to express the view Irene will not prove disastrous for this insurer of high-end homes. The break-even points for this spread at September expiration are $55.89 on the downside and $64.54 on the upside.

CB Volatility

Source: thinkorswim

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Trades: Sell to open CB September 60 puts at $3.20 and buy to open CB October 60 puts for $4.50.

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