As of 2:40 New York time the September 15, 2021 VIX Call Options with a strike at 20 (VIX210915C00020000) were trading at $5.90 a share, up 40.48% on the day on a move higher in the CBOE S&P 500 Volatility Index (VIX) of 30.35% to 24.05. I’m selling this volatility hedge out of my Volatility Portfolio with a profit of 17.5% since I added it to this portfolio on June 1.
My strategy for trading volatility using the CBOE S&P 500 Volatility Index (VIX) has two parts
The Organization of Petroleum Exporting Countries and its affiliated oil producers (OPEC+) abandoned their Monday meeting after days of tense talks failed to result in an agreement on a tentative deal to increase production, and even over how to measure production. The disagreement between Saudi Arabia snd the United Arab Emirates was so heated that OPEC+ couldn’t even agree on a date for its next meeting. When these two countries last clashed in December 2020, the UAE talked of leaving OPEC. Oil prices initially jumped to its highest level in more than six years on news that OPEC+ had failed to agree to increase production. But prices then fell as traders speculated that the failure to reach an agreement on production increases would result in unplanned increases in production.
Investors and traders are less afraid of a drop in stocks than at any time in 2021. The CBOE S&P 500 Volatility Index (VIX), which measures how much investors and traders are willing to pay to hedge against volatility in the S&P 500, is down another 3.32% to 15.44 today, June 25, as of 3:30 p.m. New York time. The drop took out the former low for the VIX for 2021 at 15.65. I have to go all the way back to February 10, 2020–before the pandemic knocked the stuffing out of stocks–to find a lower level for the “fear index” at 13.68. So today I’m buying Call Options on the VIX–which will go up if fear and the index climb for November 2021 with a strike at 19.
After Wednesday’s news from the Federal Reserve, we all know that an interest rate increase is coming–even if we don’t know when. Could be 2022. Could be 2023. And even if we don’t know how many increases we’re looking for in that time period. Could be one. Could be two. The need to revise your portfolio to take that change in monetary policy is obvious. But figuring out how and when isn’t by any means straightforward. What gives? And how should be navigate a period that is almost certainly going to end with a reversal of the lower for longer interest rates that have dominated asset prices for decades? Today, for the last installment in my Special Report: “5 Picks and 5 Hedges for a Falling Market” I’m going to take one last run at how to hedge this market and how to position your portfolio for the developing trends. (I don’t have much hope that this will be the last time I’m visiting this topic, of course.)
Retail sales fell by 1.3% in May from April, the Commerce Department reported this morning. Economists surveyed by Bloomberg had projected a 0.8% month over month drop. The month to month drop in retail sales was the first drop in month to month sales since February. Retail sales still grew a very solid 23% year over year as the economy continued its recovery from the pandemic recession of 2020.
As of the close on Monday, June 4, the major stock indexes were treading water waiting to here what, if anything, the Federal Reserve might say after the Wednesday meeting of its interest-rate-setting body, the Open Market Committee. (No one really expects the Fed to actually do anything about the monthly schedule for bond purchases or about changing the benchmark interest rate now set at 0% to 0.25%.) The Standard & Poor’s 500 was up 0.18% but the Dow Jones Industrial Average was off 0.25%. The NASDAQ Composite was up 0.74% but the small cap Russell 2000 was lower by 0.54%.
Yesterday the Standard & Poor’s 500 hit its first new all-time high since early May as investors and traders bought into the reassurance from the Federal Reserve that the 5% year over year increase in the Consumer Price Index was merely a temporary jump in inflation. Today, with the weekend immediately ahead and the June 16 meeting of the Fed’s interest-rate setting Open Market Committee looming on Wednesday, June 16, nobody wanted to get much further ahead of actual news from the central bank.
The CBOE S&P Volatility Index (VIX) dropped 8.9% on Friday, June 4, to 16.44. It’ up just slightly today to 16.73 (up 1.89%) as of 2 p.m. New York time. That’s, in my opinion, an extremely low reading on the fear index considering how many potentially market moving volatility events we’ve got ahead of us over the next six months. (For a list see my Special Report: 5 picks and 5 hedges for a falling market.) So today, June 7, I’m adding another Call Option on the ViX to my Volatility Portfolio.
The U.S. economy added 559,000 jobs in May, the U.S. Labor Department reported this morning. That was well above the 266,000 job additions initially reported for April (revised today to 278,000 for the month). That’s enough to damp worries that the post-vaccine recovery is about to stall. But the May total was well below the 675,000 projected by economists. That’s enough of a miss to allay fears that the economy is about to overheat and that inflation is about to spike. So not too cold and not too hot. Just right.
Employment numbers today suggest that we could get a Goldilocks May job report tomorrow. The ADP Research employment survey said U.S. private employers added 742,000 jobs in May. That’s the most in seven months. But it is slightly below the 850,000 projected by economists surveyed by Bloomberg.
Today’s installment includes one hedge (on the ViX) and one stock pick (Lam Research.) Now if you’ve been following along with the logic that I’ve laid out in this Special Report, you know that stocks face months of potential volatility around the Fed’s June 16 meeting (What will the Fed say about ending its $120 billion in monthly bond purchases?), the August global central bankers confab in Jackson Hole (Will the Fed use the occasion, as it has done in the past, to indicate a coming change in interest rate policy?), the Fed’s September 22 meeting (Will the Fed be content to say nothing with the next “important” meeting not until December?) and then the central bank’s December 15 meeting.) That’s a large number of occasions that could set the stock market to worrying again. And then, of course, there’s OPEC and the price of oil, the battle over the recently announced Biden budget, the continued logjam on infrastructure spending, and fact that the pandemic is still running at full speed in countries such as India (and who knows what the return of cold weather and forced winter “togetherness” will do to infection rates in the developed economies of the northern hemisphere.) At 16.74 on the VIX, you don’t need a panic to produce a profit on higher volatility. The VIX was at 22.18 on May 19. And then there are the even higher VIX levels of 27.59 on May 12, 28.57 on Marcy 4, and 28.89 on February 25.
