Perhaps I’m missing something, but it seems like the obvious strategy is to just buy volatility-related instruments: you don’t know if the market is going to go up or down, but if the new strains work anything like one would predict based on the infectiousness and the vaccine rollouts continue their shambolic slow-walk out, there will be extreme movements (even if the Fed or USG then step in) in financial instruments of all sorts.
If you can’t find anyone willing to sell you bets on stability at reasonable prices, then it would seem that the general import of the strains - ‘the future just got very uncertain and potentially even worse than everyone feared’ - is already priced in.
VIX options, VIX futures, or ETFs based on these, such as VIXY. The VIX itself doesn’t really have an underlying asset, but it’s based on the implied volatility of options. Various option spreads can work, like straddle-strangle swaps, but they’re harder to use if you don’t know what you’re doing.
Be warned, these do not move exactly like the VIX. For example, you have to pay the market a risk premium to hold VIXY, because the market pays you when it crashes. It’s like buying insurance. If you think you can predict the timing of a vol spike, it’s the right kind of asset to use, but over the long term, it’s the wrong side of risk, and you will lose more money than you gain. Don’t hold VIXY long term. I’m usually in the opposite position, SVXY, to collect that premium, but in small amounts relative to my portfolio size.
Technically any option is a volatility bet (from the view of the seller at least). But if you believe that volatility is going to increase then VIX is much easier.
The VXX is basically at multi-year lows right now, so one of the following is true: 1. Markets think that the global economy is very calm and predictable right now. 2. I’m misunderstanding an important link between “volatility = unpredictability of world economics” and “volatility = premium on short-term SP500 options”.
VXX is not a good way to compare volatility across years. VIX and similar measures are showing fairly high volatility, but no signs of new panic recently.
Markets can remain irrational, and inflated by monetary/fiscal policy or consumer repression, longer than your options can remain unexpired. Among other things—the real world is far more imaginative than any trader. You might as well ask, ‘how did markets go up with the first coronavirus?’ Better to bet on large changes through the VIX or something, rather than their exact direction & timing...
Perhaps I’m missing something, but it seems like the obvious strategy is to just buy volatility-related instruments: you don’t know if the market is going to go up or down, but if the new strains work anything like one would predict based on the infectiousness and the vaccine rollouts continue their shambolic slow-walk out, there will be extreme movements (even if the Fed or USG then step in) in financial instruments of all sorts.
If you can’t find anyone willing to sell you bets on stability at reasonable prices, then it would seem that the general import of the strains - ‘the future just got very uncertain and potentially even worse than everyone feared’ - is already priced in.
What’s an example of a volatility related instrument I could trade on right now? VIX index?
VIX options, VIX futures, or ETFs based on these, such as VIXY. The VIX itself doesn’t really have an underlying asset, but it’s based on the implied volatility of options. Various option spreads can work, like straddle-strangle swaps, but they’re harder to use if you don’t know what you’re doing.
Be warned, these do not move exactly like the VIX. For example, you have to pay the market a risk premium to hold VIXY, because the market pays you when it crashes. It’s like buying insurance. If you think you can predict the timing of a vol spike, it’s the right kind of asset to use, but over the long term, it’s the wrong side of risk, and you will lose more money than you gain. Don’t hold VIXY long term. I’m usually in the opposite position, SVXY, to collect that premium, but in small amounts relative to my portfolio size.
Technically any option is a volatility bet (from the view of the seller at least). But if you believe that volatility is going to increase then VIX is much easier.
VIX isn’t something you can buy directly.
The VXX is basically at multi-year lows right now, so one of the following is true:
1. Markets think that the global economy is very calm and predictable right now.
2. I’m misunderstanding an important link between “volatility = unpredictability of world economics” and “volatility = premium on short-term SP500 options”.
VXX is not a good way to compare volatility across years. VIX and similar measures are showing fairly high volatility, but no signs of new panic recently.
Calls on the VIX are extremely expensive at the moment. So perhaps some of the risk related to the strain is already priced in.
How do you see this resulting in markets going up?
Markets can remain irrational, and inflated by monetary/fiscal policy or consumer repression, longer than your options can remain unexpired. Among other things—the real world is far more imaginative than any trader. You might as well ask, ‘how did markets go up with the first coronavirus?’ Better to bet on large changes through the VIX or something, rather than their exact direction & timing...