Fear Index and Trading Staples

In between all the comments on the Cops and Bloggers post received while I was away, there were a few other comments on other topics and emails which are always appreciated.

Wayward Lad commented on my Weirdly Calm post on the VIX pointing out that:

Yes, Donald Trump is capable of making "volatile" decisions, but does that necessarily translate into a volatile market? So far, the US President appears to have been confined to making personality statements rather than economic statements (such as sacking the director of the FBI), therefore perhaps the market is being left to it's own devices and managing itself.

Fortunately for the world, there are checks and balances in place that prevent some of 45's most extreme policies from ever seeing the light of day - his ill-considered Muslim Travel Ban Executive Orders for example - and it does seem that the financial markets generally ignore the turmoil in Washington with each day seeming to bring with it a new revelation of incompetence at best, high crimes and misdemeanours at worst.

Having said that, Marty today commented on my original VIX post about the "50 Cent" trader, pointing out that the VIX had its most volatile day in more than eight months last Wednesday, and the trader, rumoured to be from UK based Ruffer Investment Co would have a paper profit of roughly $27 million. 

The Bloomberg article is reproduced below, but if you want the pretty pictures click on the link. It fails to mention what the cause of the spike was on Wednesday, or indeed how much 50 Cent's strategy was now up or down in total, although admittedly somewhat irrelevant given that it is likely one-side of a hedge and we don't know the other side. 

He’s been patiently waiting for the VIX to explode, and now that it has, his calls will get rolled on.

The mysterious volatility buyer or buyers dubbed “50 Cent” because of their propensity for buying large blocks of VIX call options priced at roughly a half-dollar each, had their best day of 2017 on Wednesday. The CBOE Volatility Index, commonly known as the VIX or fear index, surged by nearly five points on Wednesday to 15.59, its biggest jump since Sept. 9.

Pravit Chintawongvanich, head derivatives strategist at Macro Risk Advisors, estimates that Fiddy’s profit and loss statement showed a gain of roughly $27 million for the session. The options serve as a hedge against a stock selloff.

The Financial Times has reported that the persistent buyer or buyers of relatively inexpensive VIX call options is U.K.-based investment firm Ruffer Investment Co.

However, it’s relatively unlikely that this investor or investors, whoever they may be, will book these gains.

“Depending on how 50 Cent has structured the hedge, may never actually monetize the position, simply continuing to roll the VIX calls and enjoying the mark-to-market gains during times of turbulence,” Chintawongvanich wrote in a note to clients Thursday. “However, if they do intend to monetize at some point, we think they require a much larger move in VIX futures than we have seen so far (we would think at least until June future trade 20+).”

Most of the position is in June VIX futures and isn’t in the money yet, the strategist noted.

That said, if 50 Cent was able monetize yesterday’s impressive performance, it’s pretty clear that someone’s going to be partying like it’s their birthday.

The article's use of the expression "biggest jump since Sept 9" needs some clarification. It's true that this was the biggest daily increase in that time frame, but to clarify, the VIX has been higher than 15.59 as recently as April 13th when it hit 15.96.

One comment I briefly mentioned yesterday was from Tony, who asked:

Do you trade at all? If not why not please?

I had this question via email from Thomas also, and to him my reply was:

I don't trade much these days due to either court-siders being present or more expert traders. It's hard to find value against those people, and rather than spend hours waiting for a possible value trade, it's better for me to bet and forget these days.

I should have mentioned that many markets have no liquidity too, but even so, that answer wasn't actually a very honest one, since I answered it assuming the question was "do you trade sports in-play?"

If there are any sports markets with liquidity, no court / pitch / field / table / green / track etc. siders scooping up the value before the rest of us, let me know. 

I do trade the financial markets, employing a strategy of specialising in a handful (literally) of stocks which have a high market capitalisation, pay good dividends, and are consumer staples companies. At my age, I don't need volatility, but I've noticed that buying on sharp dips (often oversold) is usually rewarded with a quick profit, and if I need to hold the shares for a while, that's fine. This is money I won't need for years so I can hold during which time the healthy dividend helps out.

I'm not day-trading - I understand that I have no edge over those who trade full-time for a living - but am typically holding a position for a few days, which reduces the importance of my entry point being at, or close to, the low.