The podcast dives into the aftermath of a surprising Trump win and the subsequent drop in market volatility. It discusses the intricacies of risk management in finance, emphasizing the importance of hedging strategies in tumultuous political times. Bitcoin's relentless ascent is highlighted, alongside insightful market reflections on leadership changes in the U.S. Lastly, it advises considering protective measures for investments, ensuring a balance between potential gains and safeguarding against unforeseen risks.
The post-election drop in VIX illustrates a sharp decrease in market risk perception following significant political changes in the U.S.
Investors should consider employing put spread overlays as a hedging strategy to navigate upcoming uncertainties in fiscal and geopolitical policies.
Deep dives
Post-Election Volatility Dynamics
The podcast details the behavior of implied volatility surrounding significant political events, particularly elections, following a historically established playbook. This playbook suggests that implied volatility tends to be high leading up to the event, resulting in a risk premium, and subsequently decreases once the outcome is known. Following the recent U.S. election, the market saw a substantial drop in the VIX, indicating a swift contraction in risk perception, with the VIX collapsing by 20% post-election while the S&P rose by 2%. The analysis emphasizes the importance of trading strategies, such as the implementation of VIX put spreads, particularly ahead of uncertain events to capitalize on potential market movements and volatility shifts.
Market Reactions to Economic Changes
The discussion shifts to the implications of changing economic conditions and leadership dynamics on market structure and investor sentiment. The podcast notes that volatility stems from uncertainty and highlights how recent political changes might reshape fiscal policy, potentially leading to questions about tariffs and geopolitical strategies. The commentary includes that a stronger dollar and high levels of rate volatility could disrupt market stability, paralleling past events where such conditions occurred. Investors are advised to consider these variables as they create hedging strategies, particularly focusing on the significant amount of put open interest observed across multiple strike prices that might influence future market behavior.
Risk-Adjusted Returns and Derivative Strategies
The podcast explores the impressive risk-adjusted returns of the S&P 500 during a time of heightened volatility, underscoring the challenges faced by derivative overlay strategies. It highlights the S&P's substantial returns relative to realized volatility, presenting a unique scenario where a high Sharpe ratio reflects strong performance despite market uncertainty. Discussions include the viability of various options strategies, such as using put spreads to protect long positions while simultaneously managing premium costs. The narrative emphasizes the necessity of understanding market volatility in light of recent changes in leadership and policy, predicting that these factors will continue to impact investor strategies significantly.
A resounding Trump win. A collapse in vol. Bitcoin “number go up”. And up. And up. The French Whale on Polymarket got paid. A star was born in Scott Jennings. The Fed eased. And, Powell, in the words of DiCaprio in Wolf of Wall Street said, “I ain’t f’n leaving”. That’s the summary. But there’s lots more to explore and in this short pod I aim to provide you with some food for thought on the risk front. Markets have been well behaved and the VIX spiraled lower as most expected it would on November 6th. Still, there are plenty of risks on the horizon and we ought to recognize what volatility is all about. It’s how the market processes change. And it’s pretty difficult to argue that we have not just experienced profound change in the leadership and governing philosophy of the United States. Taxes and tariffs, regulation and immigration, foreign policy and Fed policy. I finish the discussion with a recommendation to stay quite long, but also spend a little premium on a put spread overlay. It feels like a small price to pay for sleep at night insurance. I hope you find this interesting and useful. Be well.
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