We have had some rather hectic times since the Fed meeting yesterday. Equities have crashed, yields imploded further, and volatilities have exploded to the upside. What is interesting is the fact investors once again did not think nor hedge the downside pre the Fed meeting. Complacency has been developing for long and has now reversed into a smaller panic.
Only two weeks ago we outlined our logic for buying cheap options. We wrote the below in our note “Vix could get Vixxed”.
“VIX is now once again down to some sort of support that has held since 2018. Currently nothing seems to be going on, and people are leaving for vacations, but possible geopolitical issues could arise whenever.
Do not forgot we have earnings coming up soon, as well as the Fed “dilemma” still very much present.
Realized volatility is low these days and VIX could go lower, but that seems a marginal trade at these levels.
Low volatility eventually feeds into people’s VaR, and results in people being more comfortable taking bigger risk, “hey nothing is moving so we will take on more risk”.
We suggested putting on hedges for various scenarios, both hedging downside, but also replacing longs with calls, all depending on your market bias.
Chasing protection at these levels is a very late trade. What many fail to understand is that protection and insurances should be bought before the panic starts. We have no huge take on the short-term direction of the markets but buying protection at these suddenly panic levels is not cheap. Do recall the wise words of Nassim Taleb we often refer to; “but protection when you can, not when you must”.
VIX traded up to 20 today and is down some post that spike, but VIX at these levels is all but cheap.
Chasing Eurostoxx 50 volatility futures here seems like a late trade as well.
Our main point remains, just as we laid out a few days ago. Pay attention to what kind of risk you are running in your portfolio, irrespective of market direction preferences. This is even more valid in terms of volatility spikes.
Source, chart by Tradingview