Hello All,
Welcome to this week’s newsletter. We are heading into another week of sell offs due in part to geopolitical and rate risks. We did, however, see some signs that recovery was on the way when, late on Friday, VIX went into backwardation. For this week, we have some major earnings being reported and they will undoubtedly set the mood for this quarter.
The Big Picture: VIX and Credit Spreads
Volatility’s natural term structure is contango, meaning the more into the future we go, the higher the volatility has to be. Nevertheless, on Friday, we went into backwardation mode, which signals that short-term volatility is apt to be higher than long-term volatility. This situation occurs when the overall expectation of the market is that volatility will be coming down in the future. Historically, this event usually bottoms out within a week, and so I anticipate a reversal at some point before the weekend. In March 2020, and again in September 2021, the sell offs we saw led VIX into backwardation for brief periods of time.
As well, I note that the credit spreads in the bond market have not widened by much, demonstrating that we are not in the meltdown mode just yet. Remember, even in bear markets, equities do not go down in a straight line. We should see some sort of a bounce this week as we are oversold in the majority of the indexes.
Option Trades for the Week
This is going to be a big week with lots of earnings, and lots of volatility, and I of course am busy with many open positions. I sold some of my equities last week in order to add liquidity for a potential reversal this week. Below is the log of all of my trades and my reasons for them. Some are hedges and some are speculative plays. If you have questions about any of these positions, please shoot me an email.
Tweet of the Week: Do not pay me in Bitcoin.
Similar to many other athletes, Odell Beckham Jr., a wide receiver for the Los Angeles Rams football team, jumped on the “laser eyes” bandwagon and when he got signed asked his team to pay him in Bitcoin. Below is a very interesting analysis of how at the moment he is being paid only 35k due to the volatility of Bitcoin.
While I am not here to argue for or against Bitcoin, I think it is safe to say that two of the arguments concerning Bitcoin – that it is an uncorrelated asset with equities and that it is a store of value – have not been holding up well lately.
One Last Thing
Last week, I wrote an article on the indicators to be monitoring so that you will know when the market is going to pull back. You can find that article here. Please take a read.
To your success,
Ardi