Time to buy VIX calls? Short Term Investment Strategies

03/21/2016 - 03:54

Greg Swanson


The fact that VIX was recently trading at a $13 handle amazes me. Complacency is off the charts whilst sh*t is a mere inch from impact with some furiously churning blades. I'm buying VIX calls with a strike of 20 and expiration in June. Longer dated because, for the last two weeks I've been unsure what the hell is going on. The Big 5 are likewise confused and called short term market tops over the past two weeks, not that they have the best track record, but still. Recessionary economic data is posted and stocks rally, S&P500 forward earnings decreases and stocks rally, Yellen confuses everyone with dovish incoherent econobabble and stocks rally. My best possibility of explaining the rally as of late is corporate buybacks, which will tighten towards end of Q1, and possibly the rally will fizzle. Eventually, reality will catch up to the market.

High Yield and Junk Bonds

The high yield, predominately corporate debt, sector is undergoing a meltdown. Years of zero interest rate policy pushed money to chase yield wherever it could be found. The oil glut (and all other commodities really) was spurred via easy credit and the only path towards price normalization is a default cycle. There have been defaults, but there are many more to come as commodity prices persist and liquidity contracts thanks to defaulting corporations. The high yield downturn began with the crash in oil prices, and will continue so long as the bad debt remains standing.

Deflationary forces pent up over the years of credit creation are pushing opinion towards the side of lower oil prices for the long term. The most reasonable and succinct indicator I've heard on when oil will rise is when significant draw downs in inventory (Cushing, etc.) begin. Currently oil inventories are building, and looking at the sudden drop in posted inventory builds relative to rival storage facilities, there is speculation Cushing is nearing capacity and is stealthily rejecting requests. All in all, oil and oil companies are in for a world of more hurt.

I'm buying HYG puts with strikes at 75, 70, and 65 expiration in January 2017. I've also been using bear put spreads to profit off near term down cycles in HYG. I believe HYG has reached a short term inflection point, and has quite a bit of downside.

Deutsche Bank, Goldman Sachs, and Citi Bank

Deutsche bank is rotting behind the curtain and strong whiffs of default are emanating. Credit default swaps are spiking while bond and stock prices are dropping in a Lehman-esque fashion. DB posted a $7.3B loss Q4 2015. The CEO just admitted Deutsche Bank won't be profitable for the remainder of 2016. Low and now negative interest rates in Europe have been eating into profits and will continue to eat profits until rates rise. DB also has a massive gross derivatives exposure. The risk with gross exposure is if a liquidity crisis rears its head, due to one of the oh so many black banking swans, gross suddenly becomes net because counter parties are unable to make whole the contract holder. All in all, outlook is bleak at best for DB. I've been trading DB with bear put spreads.

As for Goldman and Citi, bad energy sector loans are posing a potential for large losses, especially for the latter. There is rumor the Fed instructed banks to refrain from marking to market the losses on energy sector bonds, also an '08-esque theme. Low and hints of negative rates in the US are problematic to the banking sector in general.

Negative Interest Rates

Japan is doing it, Europe is doing it, everyone is beginning to incorporate NIRP (Negative Interest Rate Policy). Central forces are bent on pushing sovereign debt yields to ever lower bounds to fight the oncoming respective recessions. Fed governors are openly talking about and advocating for negative rates, so we know the possibility is well above zero. Also, judging by the most recent FOMC minutes, the reduction in projected rate hikes for 2016 is a signifier to the changing direction in interest rate policy. I'm playing this via GE (Eurodollar on CME) calls with a strike of 100 and expiration in January 2018. The long expiration date is because I believe the Fed will hold rates until 2017, after the election, and will drop in response to a US recession. According to Jim Rogers, this is 100% likely to happen in the next 365 days.

Please gauge your own investment specifics, e.g. strike prices and expiration dates, based off your desired risk using Dough.com, or some other options trading tool. I'm also looking at QuantShare as a potential tool. My investments comprise bear put spreads and long dated options, or leaps.

Every mistake I've made thus far trading options was due to the unwillingness to sell a winning trade in hopes of a greater gain down the road. Best of luck.

Trading options can result in 100% losses, trade wisely. We are not a registered investment firm, etc. so please take the following information with a grain of salt. We have no responsibility or liability for your trades based upon any information you may have read on Futuristech Info.