Monday, April 11, 2011

The Bernanke 1×2 Call Spread (TVIX; VIX; VXX)

From FT Alphaville:
By Theo Casey, a columnist at Futures & Options World, blogging live from FOW’s European Equity Options conference in Amsterdam.
Presenting the best trading idea of the conference…

The Bernanke put, and Greenspan put before it, is the notion that when the economy veers off edge of a cliff the Fed will act as the market’s insurance policy. It’s a concept that manifests itself in asset swaps with banks, interest rate cuts and quantitative easing.

Alas, as SocGen, Goldman Sachs and Morgan Stanley tell it, that easing will soon become tightening. Short and to the point from SocGen:

“[We expect] delivery on the $600bn of QE2, but no more.”

So with the stabilisers off, investors will have to come up with some insurance policies of their own. Why? Because “tail events” happen more often than some might think. A presentation by SocGen shows that equity markets have encountered twenty-one drawdowns of more than 20% over the past thirty years.

Valid criticisms aside, it is the VIX that offers the most explosive move upwards during such crises. Take this matrix of results from SG...MORE
HT: Inner Workings