Betting on a period of higher volatility.

Back in January and then in Feb, I begun calling for investors to look out for a recession. Present in both articles was a vix call trade idea, one I’ve rather shamelessly stolen from Mark Sebastian’s book, Trading Options for Edge. I’m no expert, so please go check out the nitty gritty details prior to executing the trade. I’m trusting you to be an adult about this.

To be exact, what I was fearing at the time was an economic downturn on the back of an already unstable economy. Valuations were running hot. People were actually saying something at 110x price to earnings was justifiable – because hey, it’s a growth stock, seemingly not attributing growth to be hinged on actual productivity and business transactions within an economy.

What turned out to be true instead was covid19 – the disease that quickly went international and locked down countries en masse. The VIX index spiked from 15 to 85 within a month.

Where I fucked up was two fold.

1 – I hadn’t managed my cash well, everything was in tankers.
2 – I delayed buying vix calls in Jan/Feb thinking I could instead build it in March through April.

What resulted was a massive lost in opportunity. It was a gigantic error, but that is spilled milk under the bridge.

I’m now again looking to buying VIX calls – within the coming week. I think now more than ever, we are entering a period of heightened instability. This instability can be attributed to any number of factors. I will go over them here in brief detail. You should go over them yourself via the web for detailed and more nuanced briefs.

1 – China/India’s fresh border conflicts.

I don’t think this will evolve into full out war. There are ongoing agreements for both sides to not use firearms during a clash. So what happens instead is..basically a melee gang fight. How much fighting does it take for one side to start using firearms versus another? How quickly will a situation evolve into all out war? Who are the parties involved if India/China conflict escalates? The answers are unclear. What IS clear is that IF conflicts evolve into greater levels of confrontation, the markets will not react kindly.

2 – Beijing currently has a 2nd covid virus cluster and has shut down a supermarket linked to the virus.

150 cases have been confirmed as of now. Notably the market supplies 80% of Beijing’s vegetables and meats and apparently, is used by tens of thousands of people a day. If this is even HALF true, we’re in for round two in Beijing, China. I’m certain the government has learned from their first time and were already well prepared for their 2nd, but there’s really no harm protecting your downside.

3 – US riots/covid/unemployment/Presidential Re-election/Federal Reserve Printing

If you haven’t been hiding under a rock, you’ll know that the riots have intensified in certain areas of America. Add in covid19 cases, unemployment all time highs, and a presidential re-election, and you’ve got a pretty potent cocktail. What sets that off? I don’t know. But like a room full of nitroglycerin, when one box goes boom, there’s a chain reaction that’s not pretty. Massive protests/rallies means a higher chance of covid infections which feeds into more lockdowns. Violence and protests feeds into lockdown and unemployment. All of this is being fueled and kept afloat in the markets by unlimited printings. As of last known, apparently, the Federal Reserve is also fully capable of buying bonds.

What happens if the party stops? How does it come to a close? What happens when (not if) the Feds stop printing money?

These are complicated questions. But almost all of them will in some way mean heightened volatility.

I don’t know when, how, or what will trigger any of the above events to devolve into chaos worldwide. I just know that we’re at what it seems to be – always a hair trigger away from it.

I’m buying insurance via $VIX calls, and I’m acknowledging that this money might as well be marked as a total loss – and I’m okay with it. It’s a really small sum that only pays off rather big time IF shit goes down in a catastrophic way.

Another way to play this out is to initiate a collar trade. Long term vix has sat around 13-15, so you can say at 35, we have a ways down to go. Otoh, shit happens. All I know is, I’m going to try and protect myself. Have fun. Stay safe.

Leave a Reply

Please log in using one of these methods to post your comment: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s