Gold serves as a reliable asset and hedge for risk exposure when rates and the dollar decline while stocks fall.
Shorting VIX ETPs can generate carry during high implied volatility levels and a Contango term structure, providing protection during risk-off periods.
Deep dives
Gold: A hedge against inflation and deflation
Gold is often considered both an inflation hedge and a deflation hedge, but its performance is actually tied to the dollar and interest rates. When rates and the dollar rise, gold tends to underperform. However, in scenarios where rates and the dollar decline while stocks fall, gold can serve as a reliable asset and provide a hedge for risk exposure.
Shorting VIX ETPs for carry generation
Shorting VIX Exchange Traded Products (ETPs) can be a way to generate carry if certain conditions are met. When implied volatility levels are high and the VIX term structure is in Contango, shorting VIX ETPs can offer an additional source of return through roll-down effects. Moreover, the options market allows for truncation of losses in case of a spike in volatility. Shorting VIX ETPs can provide protection during risk-off periods, as evidenced by the surge in the VIX during the market unease caused by the SIVB event.
Shape of S&P volatility skew and collar strategies
The shape of the volatility skew in the S&P provides insights into options pricing and risk management strategies. In 2022, there was a flattening of the volatility skew, meaning the premium of out-of-the-money put vol to at-the-money vol was low. This caused hedging strategies, such as owning downside protection, to fail in cushioning the market downturn. However, the flat volatility skew offered opportunities for collar strategies, particularly the straight collar, which involves long out-of-the-money puts financed by an out-of-the-money call. By reducing net short-vol exposure, this strategy can mitigate risk while still providing potential upside protection.
Welcome to the Alpha Exchange Q1 2023 Review, in which we assess some of the trends in market risk that have recently been important. We discuss gold, the performance of VIX ETP strategies and the return of traditional risk on/risk off. We also spend time dissecting changes in the shape of the S&P 500 Index volatility skew and commenting on that well known put spread collar. We finish with some information on the MacroMinds Investment Symposium, an event taking place on June 7th in New York City that raises critical funding for education focused charitable organizations. Thank you for listening.
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