Below is a continuation of a series. If you haven’t already, you may wish to read Part I and Part II.
Now onward…
This afternoon, momentum went Yellow – with a significant drop in buying volume. S&P 500 buying is weak, and the mid-cap levels on the Russell 2000 look stagnant.
While it looks like a bomb could go off at any moment, the S&P 500 Volatility Index (VIX) fell under 17 today.
There is chatter that the swell of Zero Date (ODTE) options has reduced the importance of volatility metrics. I hate to be the bearer of bad news, but the VIX isn’t going away as a harbinger of future events.
With the Debt Ceiling fiasco clearly out of focus, now is the time for us to hedge against the threat of disaster. The lower VIX, the cheaper insurance against a downturn cost.
So, let me unveil one of my favorite trades in the world.
The AJB Capital “Black Swan Trade.”
Born Under Punches
My daughter is five years old. Her initials are AJB.
She has now lived through three financial panics in her short lifetime. So who better to name my research company – which focuses on momentum and panics – than her.
Back in 2018, when Volamgeddon happened, her grandfather and I were talking. What would be the best trade to make – with a defined downside and MASSIVE upside if the markets cratered quickly?
The answer lay in the S&P 500 SPDR ETF (SPY). You see, we’re not just advocates of buying insurance against the market, but we’re also ones who recognize that chaos happens when people get too confident.
Back in December 2019, we sat down with publishers to talk about Black Swans, those random events that create global chaos and tank the markets.
Our recommendation was to tell investors to buy a single way “out of the money put” on the S&P 500 with a three- to five-month horizon.
Pay no more than $1.00.
That’s 100 bucks when volatility is low.
You’ll make money if the markets go sideways and the SPY tanks. If just volatility swells, you can make money.
And if nothing happens, you just take the loss and buy again.
This trade isn’t just a bet against a downturn. It’s a very cheap hedge against unexpected chaos.
And does unexpected chaos happen?
All the time. This is the historical chart of the VIX over the last three years. Short-term pops on the VIX happen… and happen a lot.
Trading the Debt Ceiling
I believe that there will be an agreement on the debt ceiling. But I also expect theatrics to dominate the debate. And where there are politicians shouting, there will be market participants trying to create panic.
A 5% to 7% negative momentum event could happen due to speculation alone around the debt ceiling. And insurance against this debacle, further deterioration in the banking and real estate market, and even geopolitical tensions – is CHEAP.
The July 21, 2023, S&P 500 SPDR ETF (SPY) $315 put trades for $1.05. Rather than using a big hedge for your portfolio, this can act as a very attractive piece of insurance.
If something goes wrong – if an “unknown unknown” (Black Swan) event transpires – then this is cheap insurance against the event.
I love this trade. If the market doesn’t implode, I am out $100. And that’s a small price to pay for stability.
But if this market goes sideways, this has the capacity to deliver 5x, 10x, even 20x.
To your wealth,
Garrett Baldwin
Market Momentum is Yellow
This isn’t normal. Momentum is weakening. More than 5,000 stocks fell on Thursday. And the S&P 500 squeezed up from premarket lows. I think it’s a good time to get away from the day-to-day trading and focus on the next 18 to 24 months.
*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk.
