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How To Play The Debt Ceiling Debate (Debacle)

|Includes:ProShares Short VIX Short-Term Futures ETF (SVXY), XIV

As congress moves closer to the abyss, I think it is time to figure out how to make maximum profit off of this chaos. It's the capitalist thing to do.

First, if you have money in the stock market other than to short it, you are playing with fire. There is no reason to own the stock market while this chaos happens in Washington. Yes there is a chance of a small gain but the downside risk is much greater. I recommend 100% cash (I first recommended 100% cash starting August 7th with S&P 500 at 1690).

So how do you play the Debt Ceiling? You wait. The pressure will grow and the VIX will go higher while the stock market goes lower. The closer they get to the Oct 17th expected default date, the higher the VIX will spike. Once congress finally raises the Debt Ceiling that is when the magic happens.

Assuming a deal is struck approximately Oct 16th and as long as there are no other imminent unknowns (less than 2 weeks away) we can take a long position in the stock market - I use UPRO (3x long S&P 500). The hope is the budget can gets kicked to at least January 2014 to make this play even safer. The FOMC meeting on Oct 30th is not a concern, there is no way the Fed will cut QE after these games the GOP are playing not to mention the data does not support a taper either. Although the market could freak out a little around the October 30th FOMC meeting but that is your opportunity to go long even more if you are not already fully invested.

Next you wait for the signals to go long your favorite inverse VIX ETP. My favorite is SVXY but most prefer XIV. I will post on this article and on my Stock Talk when the time is right to go long SVXY. Sometimes the timing coincides with the "end" of a manufactured crises (example - Fiscal Cliff) and sometimes it takes awhile after the crises to get the signals (example - Oct 2011 Debt Ceiling/Budget battle that took 45 days for VIX instruments to start consistently going down). Depending on how high the VIX is and how far the stock market has fallen will determine how much profit we can make on these trades. I will post expected returns when the time comes.

The Budget issue, if not kicked down the road, could be a wrinkle in this strategy. We will have to evaluate as the time comes. Also, we may be able to buy some VXX puts on Oct 30th to get even more returns. That also depends on how far the Budget can gets kicked and how elevated the VIX is on that date. More to come as that date approaches.

Quick recap: 100% cash, wait and watch the fireworks, Debt Ceiling/Budget battle concludes = go long UPRO and wait for signals to go long SVXY

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I have a small position in Oct 16th VIX call spread.

Stocks: SVXY, XIV