Buy Puts?

Some miscellaneous thoughts as equities notch another decline of 2.5%.

1. If your portfolio is too bullish or unhedged, by all means there's no reason to stay “naked long,” but at the same time this is the worst sort of environment in which to be buying puts outright, because the high IV and steeper skew means put buyers will have seriously overpaid if we get even a modest bounce over the next week or two.

2. If you want to take on speculative bearish exposure, a better way to go is with long put verticals, or if you are hedging long stock, consider long collars (buy the put, sell a call against it). The idea is that no matter what you're doing, you want to sell some options against your put buying so that if IV gets crushed, the position doesn't suffer.

3. VIX futures are in backwardation today, which is a pretty rare phenomenon in that product: Aug futures are priced higher than Sep, and historically that situation has been a good setup for selling volatility or being long the market. The exception would be a 2008-style crash.

Emotions aside, this is an 8% decline from the recent highs in SPY. It's a sudden decline, true, but not so large in the grand sweep of things. We have been maintaining smaller-than-normal exposure in the newsletter for several weeks now, and are just about ready to start deploying some serious capital in short volatility positions. For those with more heavy-duty risk aversion, I'll note that the VXH hedging strategy has been at its highest allocations in some time since last week.