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Best Ideas To Profit From Big Increase In Downside Volatility


wescobrk
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30-year zero's

 

https://ritholtz.com/2017/05/interesting-thing-buffett-seides-bet/

 

In order to achieve the $1,000,000 pay-off to charity, Mr. Buffett and Mr. Seides agreed that they should both post 50% each to an investment guaranteed to mature at the one million necessary for charity. They chose a zero-coupon US Treasury bond purchased on or about January 1st, 2008, with a maturity date on January 1st, 2018 for the full $1 million. At the time of the purchase, effective 10-year interest rates at the time were higher than 4%.

 

“What we actually did with the money – the collateral – beat the S&P 500 by a mile. We made one trade, and that trade was effectively to equities, we put it in Berkshire Hathaway, and now the collateral has made 300% during this time. The real winner was the charities and cash, not even the S&P 500.”

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I think there are two ways to approach this:

 

The first and more obvious approach is to short cyclical and highly levered companies.  Even better if they’re already burning cash in this economy.  TSLA is probably the most talked about stock in this category, but I’m sure you can find others.  These are probably better as straight shorts because the puts tend to be expensive (for obvious reasons).

 

The second approach is to buy put options on securities where you think the downside risk is under appreciated (and therefore volatility is underpriced).  I’ve been thinking about doing this with a corporate bond ETF but I haven’t pulled the trigger.  Gundlach’s recent pitch of buying a straddle on something like TLT falls into this category too, although I’m not a huge fan of that idea per se. 

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Calls/call spreads on the VIX. :P

 

Joking aside, I’d bet most people do quite well going long VXX while the term structure of VIX futures is in backwardation.  If the nature of the trade isn’t your style, precious metals and a good short duration bond manager would also prolly be a good bet. 

 

People like to laugh at Einhorn for his lousy performance the last 5-7 years, but he is a well hedged value manager with (IMHO) a string of bad luck and one bad call - shorting the “bubble basket”.  Even if I think he is wrong on several of those stocks, he is bound to capture most of the downside volatility without the same carrying cost as a straight short on the S&P.

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Anyone care to share their best ideas to profit from increasing volatility and a slowdown in the United States (and world) economy sometime in the next 2 years beside leaps on the S&P?

Thanks.

1.  Ignore the macro. 

2.  Increase exposure to cash.  [Cash is a call option on volatility]

3.  Identify high ROIC / high NOPAT companies with long reinvestment runways.

4.  Wait and watch for your price targets.

5.  Read and learn.

6.  Enjoy life and see Rule #1.

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I use a simple short system over the summer months to protect against drawdowns. On 30. April i go long a december DAX put 20% out of the money and short a put 25% out of the money with 4-5% of my portfolio. When the DAX goes down by 20% this put spread goes up >7x in value where my profit stop sits. Over the past 50 years there was a 20% correction ~20-25% of the time so every fourth to fifth year. 5% going up 7x is around 35%, so it is enough to cover a 35% drawdown in any one year.

This comes down to an expected value of 5% per year over time and is one of the best and easiest short systems i know. The DAX is full of cyclical and debt laden stocks and according to https://papers.ssrn.com/sol3/papers.cfm?abstract_id=76248 one of the best indices to do "Sell in may".

 

I do this since 2014 and had one successfull hit in 2015, but i used normal put options back than and have improved the system a lot by using put spreads. (Normal put options only go up 5x in value in a 20% drawdown, except when you can sell into a huge vola spike, but thats hard to time and backtest.)

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1.  Ignore the macro. 

2.  Increase exposure to cash.  [Cash is a call option on volatility]

3.  Identify high ROIC / high NOPAT companies with long reinvestment runways.

4.  Wait and watch for your price targets.

5.  Read and learn.

6.  Enjoy life and see Rule #1.

 

omagh,

 

If there was a "like" button here on CoBF, I would personally use it on your post! [simple Machine forums put an honor into being old fashion!] - So you'll have to settle with a quote ... - please consider it some kind of "retweet"!

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Anyone care to share their best ideas to profit from increasing volatility and a slowdown in the United States (and world) economy sometime in the next 2 years beside leaps on the S&P?

Thanks.

 

I'm tempted to try leap puts in stocks that are highly valued and highly exposed to economic conditions. One example would be VAC. It was down ~40% from its 52 week high to its Dec 2018 low, and has made that up again. Super cyclical industry.

 

I feel like there should be some industrials that would be good macro hedges as well.

 

I also have a very small % in IWM puts well out of the money.

 

I think it makes sense for me to be fully invested, and having a percent or two in hedges after a long bull run helps me sleep better.

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1.  Ignore the macro. 

2.  Increase exposure to cash.  [Cash is a call option on volatility]

3.  Identify high ROIC / high NOPAT companies with long reinvestment runways.

4.  Wait and watch for your price targets.

5.  Read and learn.

6.  Enjoy life and see Rule #1.

 

omagh,

 

If there was a "like" button here on CoBF, I would personally use it on your post! [simple Machine forums put an honor into being old fashion!] - So you'll have to settle with a quote ... - please consider it some kind of "retweet"!

 

I liked that too & actually did Tweet it.

(with proper citation)

 

I am a Twitter Twerp & my Tweets get no attention.

 

---

 

edit: Hey, you retweeted my tweet. Nice!

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Commodities?

 

...every recession in the U.S. since 1970 has been preceded by a massive commodity rally.

 

Going into each of the last five recessions, commodities as an asset class have experienced a truly massive rallies, sometimes by as much as 400 percent.  During those rallies commodities have vastly outperformed the stock market.

 

Gundlach finds it almost unbelievable how repetitive commodity outperformance late in the business cycle has been historically.  “Eerily repetitive” was his actual description.

 

https://oilandgas-investments.com/2018/top-stories/30097/

 

Commodities have been hurt by the tariff talks and the slowdown in the global economy, Gundlach said. Commodities typically move higher prior to a recession. But he is less sure of this now, because it could be overwhelmed by broader variables like inflation. With a weaker dollar, commodities have a 50%-plus chance of making money, Gundlach said.

 

https://www.advisorperspectives.com/articles/2019/01/08/gundlachs-forecast-for-2019

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Jeff,

 

Perhaps my phrasing of my post was a bit subtle. It was actually meant as cudos to you, because omagh's post skipped my attention here on CoBF in the first place. So thank you to you for bringing it to my attention by your tweet [ : - ) ].

 

:) to be of help, even if my contribution is just pointing to good stuff others wrote.

 

Twitter is once again great since I blocked a bunch of political key words.

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