/tldr short spring oil futures, long volatility, but this is not a sure bet.
I don’t think that you can get significant expected profits from betting on devastating COVID scenario. Professional market participants are not all-knowing, but neither they are ignorant. They didn’t understand that COVID is important in early 2020, but they do understand it now and they do follow the news now and they should understand what the new COVID mutations mean. It is not that difficult if you know where to look.
Don’t go for the equities. Even if you assume that this information is not priced in yet, it is not that important for the equities market. Even if the economy tanks for a year and corporate profits tank for a year, everything will recover once it over and it won’t make a difference for the share prices. The share price theoretically equals the sum of the lifetime profits discounted by the current risk adjusted interest rate. The risk adjusted interest rate is very low now, so profits 20 years ahead matter almost the same as profits in 2021, so yearly profits in a specific 2021 year don’t matter much. Equities shouldn’t tank mid-term in the scenario of COVID disaster.
Central banks and governments will compensate for the shock with expansive monetary and fiscal policies. This will bring down the interest rates even further, so asset prices should actually rise as they did in 2020, especially tech stocks, but this is a risky bet, as they might go down first due to panic.
Perhaps, your best bet is to short commodities (except gold) and oil specifically. The storage is probably filled up (please check it, I just assume that it is, but I didn’t check), so the currently produced oil should be consumed now. So if there is a demand shock, the prices should drop like they did in spring. You can make use of it by shorting the oil futures with expiries when you expect the economy to be at its lowest. I guess it is in spring.
It is also a good idea to be long volatility, so you can try buying options or VIX, but options are not a good idea for a retail investor.
If the monetary and fiscal policy is aggressive and it is going to be aggressive, you can bet on interest rates going even lower and inflation going up in a few years (but not now!), so going long long-term TIPS sounds good. The issue here is that you won’t be able to get a lot leverage as a retail investor and without leverage it is not worth it. If I could, I would buy long-dated TIPS options (is it even a thing?).
I don’t trade and have never traded any of these markets, so please take it as a random internet opinion, not as a competent investment advice.
I do trade oil and VIX futures. This is competent advice, close to what I would have written if I’d found the time. I don’t expect much reaction to this news, but if I did, I’d short March oil futures, maybe hedging by buying September oil futures.
You are right. Hedging with a long term future makes it a very targeted bet on “the real economy, especially travel halts in X months” and this is exactly what you can expect from COVID gone bad. You can see if this is priced in by comparing spring and autumn futures prices: March vs September or I would rather say May vs December. I took a look and the market is in backwardation (longer term is cheaper than short term)! The markets expect everything to be fine, it doesn’t look like COVID disaster is priced in.
I would say that it looks like a pretty good trade. Sell May, buy Dec, hold till May expiry (or till the shock is priced in) and then close both.
Little reaction to the new strain news, or little reaction to new strains outpacing vaccines and getting a large chunk of the population over the next several months?
Thank you! I’d like to keep it simple, so I’m considering some volatility ETFs, but they seem to come in the shape of short-term and mid-term futures ETFs. Which ones would you recommend for this purpose?
/tldr short spring oil futures, long volatility, but this is not a sure bet.
I don’t think that you can get significant expected profits from betting on devastating COVID scenario. Professional market participants are not all-knowing, but neither they are ignorant. They didn’t understand that COVID is important in early 2020, but they do understand it now and they do follow the news now and they should understand what the new COVID mutations mean. It is not that difficult if you know where to look.
Don’t go for the equities. Even if you assume that this information is not priced in yet, it is not that important for the equities market. Even if the economy tanks for a year and corporate profits tank for a year, everything will recover once it over and it won’t make a difference for the share prices. The share price theoretically equals the sum of the lifetime profits discounted by the current risk adjusted interest rate. The risk adjusted interest rate is very low now, so profits 20 years ahead matter almost the same as profits in 2021, so yearly profits in a specific 2021 year don’t matter much. Equities shouldn’t tank mid-term in the scenario of COVID disaster.
Central banks and governments will compensate for the shock with expansive monetary and fiscal policies. This will bring down the interest rates even further, so asset prices should actually rise as they did in 2020, especially tech stocks, but this is a risky bet, as they might go down first due to panic.
Perhaps, your best bet is to short commodities (except gold) and oil specifically. The storage is probably filled up (please check it, I just assume that it is, but I didn’t check), so the currently produced oil should be consumed now. So if there is a demand shock, the prices should drop like they did in spring. You can make use of it by shorting the oil futures with expiries when you expect the economy to be at its lowest. I guess it is in spring.
It is also a good idea to be long volatility, so you can try buying options or VIX, but options are not a good idea for a retail investor.
If the monetary and fiscal policy is aggressive and it is going to be aggressive, you can bet on interest rates going even lower and inflation going up in a few years (but not now!), so going long long-term TIPS sounds good. The issue here is that you won’t be able to get a lot leverage as a retail investor and without leverage it is not worth it. If I could, I would buy long-dated TIPS options (is it even a thing?).
I don’t trade and have never traded any of these markets, so please take it as a random internet opinion, not as a competent investment advice.
I do trade oil and VIX futures. This is competent advice, close to what I would have written if I’d found the time. I don’t expect much reaction to this news, but if I did, I’d short March oil futures, maybe hedging by buying September oil futures.
You are right. Hedging with a long term future makes it a very targeted bet on “the real economy, especially travel halts in X months” and this is exactly what you can expect from COVID gone bad. You can see if this is priced in by comparing spring and autumn futures prices: March vs September or I would rather say May vs December. I took a look and the market is in backwardation (longer term is cheaper than short term)! The markets expect everything to be fine, it doesn’t look like COVID disaster is priced in.
I would say that it looks like a pretty good trade. Sell May, buy Dec, hold till May expiry (or till the shock is priced in) and then close both.
Wow, it really, really worked out) I want my prestige points)
Good job!
Little reaction to the new strain news, or little reaction to new strains outpacing vaccines and getting a large chunk of the population over the next several months?
Little reaction to the likely spread of the new strains.
Thank you! I’d like to keep it simple, so I’m considering some volatility ETFs, but they seem to come in the shape of short-term and mid-term futures ETFs. Which ones would you recommend for this purpose?
Presumably short-term, e.g. expiring Feb/March. (FYI I’ve just bought lots of VIX Feb & Mar futures.)
Thx!
This is sound advice.