S&P volatility favored over energy volatility
The guest suggested a structural relative value trade of favoring S&P 500 volatility over energy volatility due to cross-asset disconnects.
The argument
The guest observed a strong disconnect in cross-asset volatility, noting that S&P 500 volatility appeared relatively low compared to the geopolitical risk premium embedded in energy markets. However, he cautioned that this trade requires a safety net, such as purchasing extreme out-of-the-money options, to protect against unpalatable tail events.
The thesis, stress-tested
✓ What validates it
- ✓S&P 500 implied volatility (VIX) rises relative to crude oil implied volatility (OVX)
▸ Risks discussed
- ▸Unhedged tail risk in energy markets if geopolitical tensions escalate further
- ▸S&P 500 flows continue to suppress equity volatility indefinitely
Hear it yourself
"I saw this in your book. Some people call them back spreads. You called it a one by two put spread flipped upside down. I will say that I have done a lot in that space as well. We saw gosh. This had to have been, like, 2010 or '11, and I think the S and P might have been at 900 or so. And we saw the 600, 500, one by two trade. I saw the same trade. Yep. Yeah. And I looked at this thing, and I said, if someone thinks that's a hedge if someone bought one to sell two and they were told that that's a hedge, boy, that's not gonna be it might work, but it's not gonna work for the right reasons."
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