I have confession – I have been smack in the middle of not one, but two crowds these past few weeks. First, I went to the beach – actually, the one I go to in North Carolina is rarely crowded, the benefit of having to drive a long way. Second, I have been waiting – and pausing in creating new positions – for Ben Bernanke to speak at Jackson Hole. The entire trading world is waiting to hear, parse and trade his words. His speech is scheduled for this Friday morning.
And being part of this crowd is silly – no, not the beach crowd, the “wait for Uncle Ben” crowd. Will the market trade on his words? Probably — if they disappoint or he announces a big new easing program. What will be considered a disappointment? A lack of detail and a postponement of that detail until the Fed meeting in mid-September. And that is what will probably happen.
Does this mean the market will tank, the rally will be killed, life on the planet put in jeopardy? No. If there is a selloff it will be brief. Then all eyes will turn to Europe, then back to the Fed, then to the election, then to the lame-duck session of Congress that will fail to resolve the fiscal cliff crisis, then the new session of Congress and its failure to act boldly to fix the deficit and debt mess. Notice I have not mentioned the economy.
A slowdown and mild recession is not yet priced into the market. This reality will creep up on the markets and eventually push them south, if not this year, next year. No matter. There is a lot of money to be made by leveraging the crowd.
Follow the volatility
How to do that? Right now markets are seeing historic lows for volatility. Check out the chart on the VXX, the ETF for the VIX, and you will see what I mean. It is hard to imagine volatility going lower in any meaningful way, and, given the headlines and loud noises we will hear from the politicians here and across the pond this fall, it is bound to rise. If you are a buccaneer type, you can look at calls on the VXX or the VIX itself. If you are interested in income, as I am, you can sell puts on the VXX. The premiums are rich; there are weeklies and if you manage them a bit, a few minutes a week at most, you can produce returns between 15% and 25% a year.
For example, as I write, this the VXX is trading for $11.60. If you sell the August Week 5 $11.00 put for three to four cents you get a seemingly small return. Do it 52 times a year and your annualized return is around 15%. If you sell the September $11 put, you will get 52 cents; do this 12 times a year and you get an annualized return of 56%. No kidding.
Wouldn’t it be fun to get some serious some cash back from politicians and the crowd? Think about it.