This summer is shaping up to a be a wild ride. One of the best places to benefit from the potential issues that are piling up could be in volatility investments. To be sure, investment instruments such as the ProShares Ultra VIX Short-term Futures (UVXY) and iPath S&P 500 VIX Short-term Fugures ETN (VXX) are not for the faint of heart, but, there could be outsize gains available soon.
What we have seen of volatility this year, as measured by the S&P 500 Volatility index (VIX) has been nothing short of a free fall. From a high of 30.90 on February 11th to today’s 13.92 at the open, the losses for those expecting more volatility have been massive. Those in the exchange traded vehicles have often seen worse due to leverage.
Day-trading the UVXY is a tough game as the leverage and decay can take huge hunks out of portfolio values. A more prudent approach of using call options on VXX might be the better solution for those who feel as if being accurate over a month or two can work, but being precise over a day or two might be too difficult.
In our forum, we are talking about what sorts of hedging strategies to employ, and some outright speculations with large upside. Here are some reasons why volatility could spike this summer:
- BREXIT – The possibility of the United Kingdom leaving the Euro Zone has risen to a virtual dead heat. Simply being too close to call is likely going to have an impact on market volatility. If the U.K. should leave the EU, then we could see a major spike in volatility.
- GREXIT, Spain banks, Italy banks – The European Central Bank has its work cut out for it. It’s not a just a review of the Greek bailout drama that is on tap, but some Spanish and Italian banks are in big trouble. Given rising nationalism, there are all sorts of Black Swans that could appear.
- China – The slowing of the Chinese economy is beyond question at this point no matter what the official Chinese numbers are. In order to tear down and rebuild unnecessary projects, the Chinese will need money. Already their debt has roughly doubled since the Great Recession. A devaluation could be on tap sometime this year, just in time for Trump to pounce on it.
- Brazil – Not only is Brazil in a deep recession, possibly about to qualify as a depression, but their politics are completely wrecked right now. With the Olympics there, it is very possible we see violence or terrorism of a significant and devastating scale.
- Russia – Always a threat to blow something up, but especially now that they are hurting financially and the Saudi Arabians are showing no sign of supporting oil prices.
- Iran – Ditto Russia.
- Japan – Someday Japan’s economy is going to fall out of bed. When that happens is anybody’s guess. Only the Japanese work ethic and culture has saved it so far in my opinion. The BOJ is once again talking about more currency debasement. Although extremely difficult to pinpoint a time frame for the ultimate reset in Japan, it will come eventually.
- The Fed – Although unlikely in my opinion given the international considerations, they could surprise us and raise interest rates in June. If they do, the motivation is not to stifle inflation in my opinion, the motivation is to cause a market event that cash rich Americans can exploit.
There’s more of course, but those were just off the top of my head. Enjoy the weather, at least that’s going to be better soon.