As we begin 2016, there is once again a lot of intrigue in the markets. High volatility, uncertainty in China and an election year in the U.S. are just a few factors holding sway over the economy. Simply put, there’s a lot to think about for those who earn a living in the markets.
That’s why we, in conjunction with Advantage Futures and the Chicago Board Options Exchange (CBOE), brought together leaders in the field to offer insight and predictions on how the year will play out. We co-hosted an event at our Tech Tap entitled, “Risk Management for a Volatile Market: Prepping for 2016.” At the center was a panel discussion moderated by Jay Caauwe, managing director of CBOE Futures Exchange (CFE). I sat on the panel along with:
The conversation covered a wide range of topics and included a number of interesting points that I wish we had more time to discuss. If you were unable to attend, read on for some of the key takeaways offered by our panelists.
The VIX is unique.
Unlike gold, for example, the VIX has no underlying asset. Since there’s no good model, that also means there is opportunity there. According to Euan, “it’s one of those situations where if you’re smart, you might be able to make money.” He continued, “On top of that, the VIX is still very new in the grand scale of financial markets, so we tend to think we know more about these events than we really do.”
The VIX is not a good hedge—for the most part.
Should you use volatility as a hedge? Euan and I suggested it depends on the nature of your business, but Euan said it is generally not a good hedge for equity market exposure because you have to act extremely quickly in order to capitalize on spikes.
Tail hedging doesn’t really work.
The panel agreed it is not a great strategy—it’s simply too expensive in its conventional form of buying out-of-the-money options all of the time.
There’s still room for humans.
It’s no secret that trading has become exponentially more automated over the past few decades. But with so much focus on automation, sometimes the human eye can find opportunity hidden in plain sight.
Is the Fed “The Problem?”
No one is going to make a decision on whether or not to start a business based on 50 basis points or 1%. However, growth is driven by debt—all of our growth has been leveraged assets. Where we’re talking about being in danger is in the financial economy. We’ve become very financialized, to the detriment of our economy.
The VIX will probably be lower on July 1.
Three of the four panelists (myself included) resisted an exact prediction, but noted that the VIX was high and they thought it would be lower. Euan made an important point, noting that the first thing to know when one is making a prediction is the base rate—in this case, 16-18, depending on your time frame. He was willing to put on a number on his prediction, and said 17.
Reversion to the mean is real, but timing is everything.
Larry summed it up best: “I’ve seen lots of people lose all their money being 100% right on [reversion to the mean] but just being a month or a week off.”
If you’d like to watch the full discussion, visit our YouTube channel, TradingTechTV, for the complete video, Risk Management for a Volatile Market: Prepping for 2016.
Posted by: Ari Pine, President, TradeCo Global