Those who did not liquidate their positions in equities last week are likely content as I write this article. I wrote about the VIX just a few days ago were I expressed my concern that the volatility index had risen too fast in too short of a time and that the index was likely to revert to its mean of 26.30. Early this morning, the VIX had dropped below that mean. That being the case, put options on the VIX still seem appropriate, especially with the bounce today resulting from news about a $1 trillion rescue plan for the debt crisis overseas – the U.S. Federal Reserve also said it would give a hand via offering oversea loans.
Last week was something else, we all know that. But with a barrage of data virtually everyday, I believe betting for or against volatility could be a unique play. The following Seeking Alpha article here suggests volatility is not going anywhere. If that is the case, straddling VIX options seems most warranted, but such a strategy could be dangerous if investors are not exactly sure what they are doing. I personally like put options on the VIX because I still do believe the equity markets have room to run. Those who are short the market can hedge themselves with put options on the VIX also. Investors who are long and contemplating how to lower their correlation to the market in the wake of crazy volatility, maybe buying some VIX calls or betting against Moody’s (MCO) or McGraw-Hill (MHP) via short or put positions are some ways to do so.
I wrote about the rating agencies back on April 19 here. Moody’s and McGraw have dropped more than 10% and 7%, respectively in early trading on May 10. The SEC is out for these two companies simply because their methodology is considered, by federal investigators, to be incorrect, misleading, and so on. With all of this scrutiny, I find it difficult to believe that these rating agencies can regain trust from investors let alone continue to operate efficiently.
I personally do not like how the rating agencies have also downgraded credit in the past on an ‘after the fact’ basis. I also cannot believe that Moody’s once referred to the 1st Amendment when attempting to defend itself. If every financial firm said “Freedom of Speech” when being investigated about their methodologies and disregarded the fact that millions of investors take their words and analyses very seriously, we would be in big trouble.
Full disclosure: Long VIX puts at time of writing.
