BETTING AGAINST A BLACK SWAN THE -1X SHORT VIX FUTURES ETF I Think This Is The Best Trade EVER
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I don’t know if the market decline is over. It might be. It might not. There are plenty to worries about the economy. A Harris Presidency isn’t great for stocks. Harris would continue to be tough on M&A, rejecting deals from getting done. Also expect more wage support, including higher minimum wages, which could follow through into inflation.
The indexes remain expensive levels compared to history even after the drop we’ve had.
So, there are lots of reasons to worry about a stock market decline.
What I am betting on here is not that. This bet is on the speed of the decline. Last Monday we saw the S&P down some 5% at one point, I am a betting that the decline going forward will be more measured – more orderly.
The best way to play that is with the SVIX. Here is why.
WHAT THE HECK HAPPENED
ON MONDAY AUG 5?
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These sorts of trades are commonly called “carry trades”. The term carry trade became a lot more common last week as everyone tried to make sense of Monday’s drop. But carry trades are nothing new. They also are often responsible for the sudden, out of the blue, market drops we see.
Monday was no exception.
While a carry trade is expanding, the Yen is typically weak, because traders are selling the Yen they borrow to buy other currencies so they can make their investments.
But when a carry trade unwinds, the Yen tends to strengthen suddenly. Traders and funds rush for to exit at the same time, in the process buying back Yen to close their loans.
Which is what we started to see a couple weeks ago, and what reached a crescendo on Monday.
The thing about this sort of unwind is that it’s not really “real”.
Here’s what I mean by that. In the last week I’m sure you’ve heard the talking heads talk about stocks being expensive, about the economy weakening, giving a whole list of reasons for the market decline.
But the kind of move that we saw on Monday wasn’t really any of that. Sure, all these things helped create the conditions for the unwind. But the move itself was just a giant unwind of a levered carry trade.
Why do I say this isn’t “real”?
Because once the trade is unwound, that big sudden move down ends. While that doesn’t mean the market won’t decline more, it does mean the violence of the decline has seen its peak.
That’s what my SVIX trade is all about: the end of the violent decline. Here is how it works.
VOLATILITY – MEASURING INVESTOR FEAR
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Which is what I’m betting on with this trade.
What we saw on Monday morning was something like an earthquake. The market survived that earthquake. There will be aftershocks, and it is quite possible that the bottom of the market isn’t even in, but the chances are that we have already seen the high in terms of the speed of the decline – which should correspond to the high in the VIX.
For all I know the market has 10% or more downside. But you know what? With this trade I don’t care. The call I am making is simply on the speed of the correction.
As the decline slows, you’ll see the VIX index come down. And the SVIX go up.
CASHING IN ON “THE ROLL”
We express that by saying–over time, the VXX experiences natural decay. Over the last years, the 10 year average VIX contango is 5% per month.
Not so with SVIX. In fact, the opposite plays out. Because the SVIX is inverse the VIX, it benefits from the contango.
If the index goes nowhere, the SVIX gains by its purchase of the 2nd month and sales of the first month contract. On average this is a gain of just over 5% per month. In other words, if nothing else happens, the SVIX makes money every month. This is what I call a “structural advantage” in this trade, and it is INCREDIBLY POWERFUL for SVIX.
If you have wrapped your head around this and decided that’s a good thing, you’d be right!
Longer term, this dynamic is why the pros consider the VIX to be an ‘investment grade short’. It has declined 82.5% over the
past three years and 18.2% over the past year – and that is after the big spike we saw on Monday.
As for the SVIX, well it is the opposite. I’d call it an “investment grade long“!
Imagine Wall Street creating a financial product that structurally BENEFITS investors—this is it!
THE BIG RISK IS A BLACK SWAN
There is a reason so many investors pile into them. It is because almost all of the time, nothing happens.
What I like about my timing here is we are putting the trade on right after an event. Its rare to sustain the level of volatility you had from the first spike. For that to happen, you need a scenario like what happened with COVID, a sustained threat to the global economy.
I don’t think we have that today. We have plenty to worry about to be sure and there are lots of reasons for the market to tread water here or even slip a little more. There is also always a sharp punch up or two after events like Monday, after shocks, and we probably won’t go down to a 12 VIX or a 15 VIX even anytime soon.
But over time, the VIX will come down. The SVIX will go up. And this trade will make money.
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Keith
Source: https://oilandgas-investments.com/2024/latest-reports/betting-against-a-black-swanthe-1x-short-vix-futures-etfi-think-this-is-the-best-trade-ever/
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