4. The winning trade of the quarter in all my estimation is going to be short volatility. There’s a pretty easy way to play it – short shares of TVIX (which holds a 50/50 notional short of the CBOE VIX futures front month and second front month, cost of shorting is about 5%), or just short the futures directly (margin on this is US$30k/contract, so that’s basically like posting 60% collateral at present). Be cautioned that an ongoing trade that worked for the entirety of 2019 was to short volatility, and this continued to work until about the middle of February, where sophisticated quant funds that structured paired trading (namely taking extreme advantage of volatility/index rollovers) were absolutely crushed as a result of the Coronacrisis.
I do not frequently have macro convictions but this is one of them where I do. The justification is pretty simple – bad news stemming from Covid-19 is going to continue flowing in, and the consequences are foreseeable (death, defaults, and dysfunction). That said, the probable scenario is that liquidity injections are going to mop up volatility like a dry sponge in water, and things will calm down to the “new normal”. There will be spikes up now and then, and these spikes should be shorted – similar to how taking such a procedure with Marijuana companies over the past 18 months would have been highly profitable. Unlike marijuana companies, however, you have a much smaller cost of carry to hold a short position on volatility.
Shorting puts on the S&P 500 also will work, but why muck around with the index?
5. More macro convictions (perhaps this is a sign I am mentally losing it during the self-isolation period) – The Hong Kong dollar is close to its lower band (the band being 7.75 to 7.85) – the last trade is at 7.752, which represents the strongest the Hong Kong dollar has been in quite some time – it was at its upper band (7.85) during the protests last year (which seemed so far long ago). There’s no leveraged way to play this, but macro-wise, I’d suspect shorting HKD will net a few bucks over the next year. The carry trade is negative (i.e. HK interest rates are higher than US currently).