First Some Business:
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Today on my podcast 'The Option Block', my co-hosts and I were talking about today's massive turnaround. This led to a discussion about what assets were risky in relative terms. We also were not talking about buy and hold. We were talking about SPY, GLD and TLT from a trader’s perspective. Before I let you in on what we thought, I want you to take a quick look at a chart of SPY, TLT and GLD first. Ask yourself: Which of these assets is most likely to see the floor fall out from underneath it:
SPY
GLD
TLT
While we all agreed that SPY is a risky asset, and that there are good reasons the VIX is so high, the three of us quietly wonder how much more real downside there is in the near term. The risk of a full Greek default should be somewhat priced into to stocks. The economic slowdown is likely priced in, and the SPY has already taken a dive falling just under 20% high to low.
Looking at GLD, the asset looks like it has already begun a downswing and is likely heading lower. However, now that it has already sold off almost 12%, at least the precious metal has made some of its move. There is a strong case that can be made though, that this asset is heading for a continued sell off. GVZ touched on new 52 week highs today. GLD is moving at a decent daily clip, and traders wonder whether the asset class has hit a temporary top. My thoughts, once one starts seeing cash for gold on TV, there is only about a year before the asset has peaked (if that).
Now, onto TLT, long term interest rates are in the 3% range. Do we really think that this can stay that way forever? The answer is no. While the Fed may keep rates low, it’s not the Fed that is driving interest rates, it's Europe. Once there is any clarity in Europe, those who think that bonds cannot crash down are going to learn a very rough lesson. In that time, we will see Treasuries and all related assets get pounded. The dollar will probably take a beating too (although it is just now being priced somewhat fairly relative to the Euro). If you don't believe me, pay attention to bond volatility; it’s almost as high as VIX and GVZ. In relative terms, I think it should almost have the highest vol, because of the speed at which markets will turn.
How to trade it:
When the Greek and Italian situation finally cleans itself up, I think traders will be surprised by the price action of all of the major assets. TLT is going to get destroyed, GLD is going to sell off, and SPY is going to explode upward. Gamma will be a great asset to have, vega will not. Best trade: sell time spreads. Can’t sell time spreads, get a futures account. There are other equity trades, but selling calendars is the easiest.
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