Even a Small Correction Could Cause a Panic
Fear has disappeared... A new record in complacency... Why volatility could double overnight... Even a small correction could cause a panic... A 'no-brainer' bet on the return of fear...
It's official: Volatility has fallen to an all-time low...
Regular readers know stock market volatility – as measured by the CBOE Volatility Index ("VIX") – has plummeted this year.
The market's so-called "fear gauge" jumped above 20 following last June's "Brexit" vote. It briefly spiked again following November's U.S. presidential election.
But the VIX has been trending lower ever since. And it has spent the better part of this year trading near its all-time lows. Today, however, we no longer have to say "near."
The VIX plunged as low as 9.04 this morning...
That's well below the previous closing low of 9.31 set on December 22, 1993, and just shy of the all-time intraday low of 8.89, set five days later. Today also marked the eighth consecutive close below 10, which has never happened before.
How long will this trend continue? Unfortunately, we have no way to know. What we can tell you with absolutely certainty is that today's tranquility won't last forever.
History is clear... Periods of market calm and complacency (when the VIX falls into the teens or lower) are always followed by periods of volatility and fear (when it leaps past 20). It's only a matter of time before the next panic arrives.
And the next market panic could be one for the record books...
You see, betting on lower volatility has been "easy money" for months now. And this has enticed speculators to jump in to the trend in droves.
Regular readers know we like to follow the U.S government's Commitments of Traders ("COT") report to gauge sentiment in markets like U.S. Treasury bonds, crude oil, and precious metals.
Traders can buy and sell volatility futures like any other financial instrument. And the COT follows them, too.
As you can see in the following chart, non-commercial traders – the so-called "dumb money" – are betting on lower volatility like never before...
They're currently holding a net short position of nearly 140,000 contracts. This is just shy of the all-time record set earlier this year.
Remember, these traders are called the "dumb money" because they tend to be wrong at extremes. As a group, they get super bullish at market tops and super bearish at market bottoms.
So their massive short position today suggests the next big move in volatility is likely to be higher.
Even a small market decline could push volatility sky-high...
Recall that stocks and volatility tend to trade inversely. In particular, spikes in the VIX usually occur during stock market declines. And the more sudden or sharp the decline, the bigger the jump in "fear" tends to be.
But that may not be the case today. Because so many traders are short the VIX, even a relatively small pullback in stocks could push volatility much higher. This is because traders have to buy the VIX to close their short positions, and this massive buying pressure could push it even higher.
In other words, we could see something of a "short squeeze" in volatility itself.
In fact, we saw a small example of this during the "mini panic" back in May. The broad market – as tracked by the S&P 500 – fell less than 3%. But the VIX jumped 50%... from near 10 to more than 15 over just a couple of days.
If we experience a broad-market pullback of 5%, 10%, or more - and remember, we're long overdue for one - volatility could easily double or even triple from here.
How would you like to make $256 million in three months?
If one notable investor is correct, the next big spike in volatility could be just around the corner. As the Wall Street Journal reported on Monday...
One investor has bet on a powerful resurgence in market turbulence – a wager that could net a profit of about $265 million if Wall Street's fear gauge more than doubles in the next three months.
An unknown investor made a massive trade via the options market Friday... About 1 million options contracts changed hands on a bet that the... VIX, will rise to 25 by October. That's a level the VIX hasn't reached since June 2016, when the U.K. surprised global markets by voting to exit from the European Union.
If he or she is correct, Friday's investor could see a payout of about $265 million, according to Stefan Wintner, vice president who covers volatility strategies at the commodity trading adviser Dunn Capital Management, which is based in Florida.
Now, this is a relatively risky bet... The unknown investor opened a "three-legged" trade that involved buying call options and selling two different put options.
This trade not only requires volatility to move higher in the next three months to be profitable, it requires the VIX to trade in a relatively tight range near 25 as it does. If the VIX remains low – or if it rises too high – this investor could lose millions. More from the Journal...
Should the prolonged calm that has dominated markets continue – and the VIX stay at its recent lows – the investor could get burned and lose about $60 million, according to Mr. Wintner, since he or she is essentially short the puts that were sold. The investor could also lose money if the VIX climbs far above 25, he said, because of the 500,000 calls that were sold.
"I've never seen anything bigger," said Mark Caffray, a managing director at PTR, a floor broker at the Chicago Board Options Exchange specializing in the VIX and S&P 500. "It's pretty aggressive, and very bullish on VIX."
A 'no-brainer' way to profit from higher volatility...
Of course, regular readers know Porter and his analysts are recommending a similar – but far less risky – strategy to help readers profit from the rise of volatility, too.
In Stansberry's Big Trade, they're recommending cheap, long-dated put options on a proprietary list of the 30 most troubled companies in the market today – a list they've dubbed the "Dirty Thirty."
The potential benefits of this strategy are twofold... First, just like the trade above, these options will surge higher when volatility inevitably returns. But that's not all... Each of the companies they've identified is heavily indebted and has a terrible or failing business model. These are companies that are likely to struggle even if stocks continue higher and volatility remains low. And they're unlikely to survive when the next downturn comes.
In other words, Stansberry's Big Trade subscribers are positioned to profit from both the return of volatility – which could happen long before the bull market ends – and the unstoppable decline of these troubled firms.
Best of all, record-low volatility means put options have never been as inexpensive as they are right now. Thus, it has never been cheaper – or as potentially lucrative – to use this strategy as it is today.
You can literally protect your entire portfolio by putting just a small percentage of your money in this strategy... meaning you can stay in stocks to profit from Steve Sjuggerud's "Melt Up" with far less risk.
If you're not already taking advantage of this strategy, you owe it to yourself to learn more. Click here for all the details.
New 52-week highs (as of 7/24/17): Amazon (AMZN), Boeing (BA), Becton Dickinson (BDX), ProShares Ultra Nasdaq Biotechnology Fund (BIB), Baidu (BIDU), iShares MSCI BRIC Fund (BKF), CBRE Group (CBG), Euronet Worldwide (EEFT), Emerging Markets Internet & Ecommerce Fund (EMQQ), iShares MSCI Singapore Capped Fund (EWS), iShares MSCI South Korea Capped Fund (EWY), Facebook (FB), iShares China Large-Cap Fund (FXI), PureFunds ISE Mobile Payments Fund (IPAY), iShares U.S. Aerospace and Defense Fund (ITA), JD.com (JD), KraneShares Bosera MSCI China A Fund (KBA), KraneShares CSI China Internet Fund (KWEB), iShares MSCI China Index Fund (MCHI), NVR (NVR), ProShares Ultra Technology Fund (ROM), ALPS Medical Breakthroughs Fund (SBIO), Tencent (TCEHY), Verisign (VRSN), Weight Watchers (WTW), ProShares Ultra FTSE China 50 Fund (XPP), short position in Brinker International (EAT), and short position in IBM (IBM).
In today's mailbag, two subscribers have questions about "junk silver," and another wants to learn more about our Stansberry's Big Trade strategy. Send your questions and comments to feedback@stansberryresearch.com. As always, we can't provide individual investment advice or respond to every e-mail, but we read them all.
"In your Stansberry Digest of 7-24-17, you advised that a bag of junk silver (pre-1965 coins) contained 90% silver, and that $100 face value of coins contained 71.5 ounces of silver. Will you please advise the silver content of silver dollars? Are they 100% silver? Did the silver content get reduced after a certain date? I would appreciate your comments. Thank you." – Paid-up subscriber Thomas Hart
Brill comment: U.S. silver-dollar coins issued before 1965 – including Morgan Dollars (issued from 1878-1921) and Peace Dollars (1921-1935) – are also 90% silver. However, unlike the dimes, quarters, and half-dollars sold in bags of junk silver, silver dollars contain 77.36 ounces of silver per $100 in face value.
Eisenhower Silver Dollars (1971-1978) are just 40% silver. And American Silver Eagles (1986-today) – which are also legal tender with a face value of $1, but were never officially used as currency – are considered "pure" bullion at 99.93% silver.
Again, when buying junk silver or simple bullion, the key is to pay the smallest premium possible. Some less than reputable dealers try to sell these coins at inflated prices to unsuspecting customers.
"If a $1,000 bag of junk silver coins has a melt down value of $11,440, why is there any available? How does one convert that bag of junk into big money; is it not illegal to deface (or destroy) US currency?" – Paid-up subscriber Jim Baxter
Brill comment: We think you've misunderstood us, Jim. In that example, $1,000 is simply the face value of the coins in the bag... It's how much you could buy if you used those dimes, quarters, and half-dollars as currency. But bags of junk silver are bought and sold based on the value of the silver they contain, not their face value. In this case, it would cost you $11,440 to buy a $1,000 face value bag of junk silver today.
"Hi there, I have been a subscriber for a bit now. I love your research but I feel like when you talk about options... I have no idea what is happening. Is there somewhere I would be able to learn how to do this [Stansberry's Big Trade] strategy? Something that describes the strategy in detail for me? So I can learn about it and start implementing in my portfolio? Please let me know if you do. I am also a subscriber to TradeStops 🙂 Thanks." – Paid-up subscriber Irena Mota
Brill comment: Stansberry's Big Trade – as well as all of our other options-based services – includes access to "The Stansberry Research Guide to Options Trading." This guide includes everything you need to know get started with options, including the easy way to understand calls and puts, how to pick the right options trade, how to limit your losses, how to calculate risk and reward, how to determine proper position sizing, and much more. It will even show you how to set up your brokerage account for options trading.
In other words, if a lack of experience with options is the only thing holding you back from trying this strategy today, we've got you covered.
Of course, that doesn't mean Stansberry's Big Trade is for everyone. For example, if don't have at least $50,000 in your investment portfolio, it probably isn't right for you. You can learn more about the risks and rewards of this strategy right here.
Regards,
Justin Brill
Baltimore, Maryland
July 25, 2017