Second Shot at Hedges

Vol reverted right back. Did it scare you enough to hedge?

Setting the Table:

• We have reversed the “elevator down, stairs up” dynamic. This is usually how market rallies and sell offs tend to happen, but this time we saw a hard sell off turn into a harder rally. The VIX is back to the same levels as before the “bad employment report” two weeks ago that sparked a group-think powder keg.

  • Context matters a lot in markets. Like Stanley Druckenmiller said “people always forget that 50% of a stock’s move is the overall market”. Whether playing earnings or managing a macro portfolio, a trade needs to be robust to the various gyrations - even if they don’t make sense. 

• Earlier this week Michael Hunt of VolVibes posted the below chart (arrow my own, highlighting most recent prints.). The x axis shows absolute VIX levels - and while we didn’t hit COVID levels, 35 is a scary print. But more so than the absolute VIX level, is the realized vol of that VX future on the Y axis. Only Volmageddon shows higher volatility of implied vol, relative to the absolute VIX level.  Spike than crush, tout de suite.

  

• So what is an options trader to do in an environment like this? The index fund dollar cost averagers are hoping that a paycheck hit to buy a few more shares when we were down, but otherwise barely noticed.

• Hopefully you didn’t reset an overlay too low. That’s the catch with timing, and why we like to tranch out our strategies. If there’s a place for discretion, here is where I like to nudge a trade. When volatility is higher than usual during a reset, consider using it to give yourself either tighter downside protection or more room to run on the upside. Or pay up on just a part - you’ll feel better. 

• VIX over thirty has everyone wishing they hedged. Rarely do you get the opportunity to pay last week's prices in the market, but here we are again. Today we’ll review how the dynamics have changed for our two primary hedging strategies.

  • The GULL buffers market moves with a hedged equity overlay (long put spread, short call).

  • OWL protects capital in bills while participating in equity gains via options spreads.