Skip to main content

Morning Update

Today is the 25th anniversary of the 1987 market crash, a day when the S&P 500 fell over 20% and traders learned the importance of covering their tail risk. Today it is as imperative as ever to cover your tail risk, and yesterday we saw one trader doing just that. With the January VIX future trading at 19.20, one trader bought 11,000 Jan. 45 VIX calls for $0.30. These calls are 136% out of the money and to many it may seem like wasted money. However, should a black swan event occur between now and January these calls will explode in value as traders scramble to buy portfolio protection and implied volatility skyrockets. There is no shortage of headlines that could come out of Europe, the Middle East, or America that could cause a massive sell off, and that is why we are seeing so many traders hedging right now. At the same time it only takes a glimpse at a chart of the S&P 500 the past year to see that it is a bull market. We want to be invested in the market right now, but also have tight hedges on should the uptrend abruptly reverse. Buying deep out of the money VIX calls is one way to accomplish this, though it can be costly due to options decay and need to be rolled forward at expiration. However, it only takes one extremely volatile day to make this insurance pay for itself. As traders in 1987 will tell you, it was the people with long volatility positions that has the last laugh who were able to stay in the business to trade another day.

Comments

Post a Comment

Popular posts from this blog

Is the KCJ Foreshadowing a 2008 Repeat?

The CBOE Correlation Index (KCJ) is close to the lowest level we have seen since it was first listed in 2007. The KCJ measures the implied movement of the S&P 500 components options, compared to the implied movement of the S&P 500 index options. Simply put, the higher the number, the more likely all stocks are going to move together. Conversely, a low number will be characterized by sector rotation, and flat markets; one sector moves higher, another moves lower.  (Source: Access Hollywood) Correlation, for lack of a better term, is correlated with volatility. Not surprisingly, 30-day S&P 500 historical volatility is near the low level of 6.5%. Currently at 33.5, KCJ is sitting close to rock bottom, lower than where it was in 2007, (but not lower than where Lindsay Lohan was in 2007).  So far this year, the market has been able to grind higher, characterized by leadership in FANG(Facebook Apple/Amazon, Netflix, Google) and sector rotation. A...
Post a Comment
Read more

Morning Update

ECB officials said last night that ECB President Mario Draghi will likely wait to hear Germany’s Constitutional Court’s ruling on the EFSM before publicly unveiling his plans. Many were hoping Draghi would unveil his plan after the ECB’s September 6th meeting, but this is becoming increasingly unlikely. Today Reuters is reporting that Germany is the latest European nation to begin studying the possible impact of a Greek exit from the Euro. This comes ahead of Chancellor Merkel’s meeting with Greece’s Prime Minister today. Merkel has repeatedly said that she would like Greece to remain in the common currency, though clearly someone in Germany believes a Greek exit is possible outcome worth preparing for. This morning US new durable goods orders numbers we released for July, coming in at a gain of 4.2% M/M. Though this was strong than expected, it was primarily driven by strong aircraft sales. Non-defense orders excluding aircraft were down a sharp 3.4% M/M versus a 0.2% decline expecte...
Post a Comment
Read more

Morning Update

This week a troika of international inspectors will come to Athens. The inspectors, from the European Commissions, the IMF, and the ECB will formally appraise Greece’s delayed overhauls implemented since the June 17 elections. Without gaining approval from the troika Greece risks being cut off from aid, the next round of which is due in September. Domestically the focus of this week’s data will be Friday’s final revision of first quarter GDP. However, next week’s data is likely to rile markets more with both an FOMC meeting and Non-farms payroll report. This morning McDonalds reported second quarter EPS of $1.32, down from $1.35 a year earlier. Revenue grew $0.01 billion to $6.92 billion year over year. This came against consensus EPS estimates of $1.37 on revenue of $6.94, which had already been revised down $0.08 in the preceding weeks. McDonald's U.S. generated comparable sales growth of 3.6% for the quarter, while the European division delivered comparable sales gr...
Post a Comment
Read more