Perhaps the biggest no-brainer trade of this COVID-19 economic crisis (which is going to come to an end pretty soon) is shorting volatility on spikes. Today was the first real spike up since April 7th (which wasn’t much of one). I’ve attached the spike – and note just before Easter it was at around 33-34%:
Long-time readers of the site knows that I’m generally into fundamental analysis but once in awhile, there are trades out there that are so seemingly skewed to risk/reward that I just have to take them. The even better news is that unlike scammy marijuana companies, in the futures market your only price of admission is the initial margin and you don’t have to worry about borrowing, or carrying costs or anything like that, only a US$2.38 commission to get short a contract of US$1,000 times the index of notional value (i.e. every point the VIX goes up or down, your equity goes up or down US$1k per contract).
Of course, there are always risks. Who knows, Supreme Leader Kim might decide to launch the nuclear missiles, or there might be a 9.0 Richter scale earthquake in San Fran or some other catastrophic event, so this is why you never, ever go all-in on a trade (VIX would skyrocket). However, on the skewed balance of probabilities, by the time May comes rolling around, I’m pretty sure VIX is lower. Every quant fund out there on this planet that didn’t get wiped out on March 23rd is now applying the same rubric in our ultra-loose monetary policy situation and is making coin with volatility suppression – the S&P 500 doesn’t even have to rise to make this trade work. In fact, if it meanders, the trade works even better.
One of the biggest winners of all of this volatility has been the HFT firms, including Virtu (VIRT), but I would not invest in their stock. It is interesting to note, however, that they averaged about US$9.5 million in net trading income a day in Q1-2020! Holy moly!