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Preparing For The Next Bout of Volatility

by / / Articles, Trade Ideas
After nearly 9 years into the equity bull market, a strong US economy coupled with signs of inflation starting to make it’s way into the system has lead to interest rates in the US starting to rise. The United States 10-Year Government Bond Yield recently rose to 2.90%, it’s highest level in four years. While the yield has been rising over the past few months, the threat of the rapid rise in inflation saw equity markets sell off in dramatic fashion, with a 12% decline on the MSCI All-Country World Equity Index from the peak of 550 on 29-JAN to the low of 491 on 09-FEB 2018.

With that we saw volatility, as measured by the CBOE Volatility Index rise to it’s highest level in over 4 years, testing 50 from a reading of 12 just 3 days prior.  


MSCI All-Country World Equity Index vs CBOE VIX
A look at the daily chart of the MSCI ACWI sees the price nearing the 61.8% Fibonacci Retracement level, a common technical resistance area and a level where sellers may again start to emerge.

Buy The CBOE VIX

Technically, we saw a break of the long term downward trend and with a re-test of the breakout level currently taking place, giving traders a second opportunity to take a long position.

Here, my idea would be to buy an 
Out-The-Money Call Option on the CBOE Volatility Index, taking a 6 to 8 week view with the expectation that we may see another move lower on global indices and another spike in volatility.

Trade Details

Buy OTM Call Option on CBOE VIX

Expiry Date: 18 April 2018

Strike: 28.00
Underlying level: 20.60 (last close)

 

Lester Davids

Lester Davids

Trading Desk Analyst at Unum Capital
Lester joined Unum Capital in July 2016 and is a Trading Desk Analyst focusing on local (JSE) and global multi-asset class technical analysis research which includes idea generation.
Lester Davids
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