After enjoying a nice recovery for more than two years, equity markets have been in for a rough ride that has driven major indexes 5 percent lower for last week and 13 percent lower for the month. Increasingly, markets are news driven, responding to the latest headlines from Brussels or from Washington on ongoing sovereign debt woes and its impact on banks and financial institutions.
Lackluster macroeconomic data on both sides of the Atlantic add to market volatility, without a catalyst to ease the situation in sight. So what can traders and investors do? How can they ride the increasing volatility in the financial markets?
Here are four trades to consider:
1. Buy gold and silver ETFs like SPDR Gold Trust (GLD) iShares Silver Trust (SLV) or buy in or out of the money calls. Gold and silver have become the asset-shelter from the fear of an impending financial collapse. They run up any time a headline comes out on debt woes. However, the problem is that the premiums on such contracts are quite expensive, and these trades are already “crowded” trades. This means that contrarian investors may want to begin gradually taking the other side of the trade, shorting the two ETFs directly or by buying puts.
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2. Buy iShares Barclays 20 Year Treasuries (TLT) or buy in or out of money calls. US Treasuries are another asset-shelter from both a fear of an impeding financial collapse and an impending recession. The problem, again, is that the premiums on such contracts are quite expensive, and these trades are already “crowded” trades. This means that contrarian investors may want to begin gradually taking the other side of the trade, shorting the ETF directly or by buying puts.
3. Buy in or out of money puts on SPDR S&P 500 (SPY) or SPDR Select Sector Fund - Financials (XLF) to take advantage of a further decline in the overall market or in the financials. But, again, given the large size of the correction already in the cards, contrarian investors may want to gradually establish positions on the other side of the trade.
4. Buy volatility, through the purchase of iPath S&P 500 VIX Short Term Fu (VXX) or indirectly through the purchase of Calls on VXX. The problem, however, is that VXX had a big run-up already and call premiums are already high. This means that contrarian investors may want to short VXX or buy puts at this point. Another choice will be to buy both calls and puts with the same strike price. But, again, premiums are quite high.