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Time to hedge as Wall Street volatility dives

“We believe VIX has neared its theoretical floor for the year.”

Nov 22, 2019, 08.52 AM IST
Wall street reuters
The rally in US stocks may have waned, but equities are still near record highs amid subdued volatility. For some strategists, that may be the perfect time to seek protection.

Macro Risk Advisors suggests a trade that involves selling a put option on the Cboe Volatility Index with a strike of 12, while buying a 20 call and selling a 22 call. Derivatives strategist Maxwell Grinacoff wrote in a note Tuesday that he backtested the strategy, both unconditionally and when VIX was below 13, and found it has performed relatively well since the beginning of 2018. “We believe VIX has neared its theoretical floor for the year,” Grinacoff wrote. In addition, historical correlation trends in the S&P 500 around earnings season imply “a higher level of realized volatility going forward.”

These calls for vigilance are already bearing fruit. The VIX rose to its highest level in nearly a month on Wednesday after a report that the U.S. and China are unlikely to reach a trade deal this year.

Europe long volatility looks relatively attractive with the VStoxx Index so low, UBS Group AG strategist Stuart Kaiser wrote in a note November 17. The European volatility gauge fell to 11.54 on Nov. 15, compared with this year’s mean of about 15.3. Kaiser also likes the iShares Russell 2000 ETF as a preferred medium-term growth-sensitive hedge. Put-option strategies on the SPDR S&P 500 ETF Trust are seen as the most attractive hedge by Credit Suisse Group AG.

Evercore ISI agrees with that. The firm’s options team recommends buying SPY February $304 puts and selling $287 puts, strategist Dennis DeBusschere wrote in a note Tuesday, citing weakness in US growth data, a slowdown in China and defensiveness showing up in VIX futures.
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