4 August

Nobody trusts this market

One of the topics over past weeks has been the extreme bid in protection vs what the market actually is doing. We have had a few sharp moves lower, but that was “fixed” in 24-48 hours.

While 3 month realized vols have trended small lower/threaded water, the 3 month implied vols have continued higher.

Unless you think there is something big occurring this month, vols and especially the short term VIX looks rich.

How do you play this?

Given how far we have come and the fact there is some uncertainty going forward we would look at earning some “extra summer yield” for the people that want to stay long. Why not overwriting some of your favorite longs; covered calls for example?

If you need portfolio hedges you should NOT look at long short term VIX exposure, it is simply too rich. Skew remains steep, so put spreads still make sense as an overall portfolio hedge.

If you think this slow grind higher at highs goes on for longer, a simple sold straddle/strangle also makes sense given how elevated vols trade.