How to play a Thomas Cook-style meltdown

Thomas Cook's financial woes knocked its share price for six this week. Tim Bennett outlines a spread betting technique to profit.

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in Features

Bad days on the stock market don't get much worse than Tuesday if you are Thomas Cook. Its shares fell an eye-popping three quarters before putting in a small recovery on Wednesday. Anyone who happened to be short the shares is probably sitting in the Bahamas right now sipping a gin.

However, another group of betters will have done very nicely too. And it's their strategy that's worth adding to your toolkit.

You see Thomas Cook (LSE:TCG) wasn't alone. Huge rival TUI (LSE:TT.) also took a battering on Tuesday as investors assumed that what's bad for one firm must be bad for another in the same sector.

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But Thomas Cook's woes were pretty specific to the firm last week. Any time you have to go cap in hand to your bank and ask for refinancing you are going to spook your investors. But while TUI may be in the same hapless travel sector which is being battered by consumers hunkering down, the internet and specialist operators it has not been having the same conversations with its lenders.

So on Wednesday, when investors who had been busy dumping both stocks cottoned onto this, shares in TUI put in a pretty decent bounce from around 135p to more like 155p. And it's here that the right trade would have made good money.

Anyone long TUI via a spread bet at, say, 135p for £10 a point (where one point is a 1p move in the share price) could have taken away around £200 tax-free (20 points x £10). Obviously, the bigger the bet the bigger the win.

And the beauty of this type of bet is its predictability. When a Thomas Cook shock breaks, rivals get initially sold off too and then bounce faster and further when investors realise that Thomas Cook's problems are largely its own.

Tim Bennett

Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.

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