Trading Journal - Coronavirus Shadow (06.18.20)

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As written in yesterday's post I was short the market and would close out early in the opening of today's session and proceeded to do so with small gains. It turned out to be a decent decision because index stocks closed flat for the day. The DIX ended yesterday at 50% but today hit 51.3%. Not going against a DIX 50 and above as it means market makers are having to force to buy up the market.

In the title of this post I wanted to focus on the future prospects of the economy in the US. Markets. Today another 1.5 million unemployment benefits were issue for the week making it 13 weeks in a row where more than 1 million filed for unemployment. This is 40+ million unemployed. The prospects for upcoming months in consumer demand is difficult to believe will recover. Even FED Chairman Powell was admitting some of the unemployed will never be able to return to their line of work.

The after effects of the virus has just started as US is still trying to mitigate the spread. Mulitple states such as Florida and Texas have rise in daily cases while other states have dwindle to lowest since start of tracking cases. Still overall US is flatline in cases but not declining. A coronavirus shadow effect is in store for the US economy in a way that can not be known. This includes if states reopening will be expedited or hindered. How consumer demand will reach back to pre virus conditions or how people work post virus conditions. All these issues effect the economy which is the baseline of the markets.

If the market was acting normal the underling evaluations would likely be lower than where it currently is. This is not an assumption but the logic thinking that poor economy will lead to poor revenues and profits. Hence evaluations have to be lower. However central banks have injected so much liquidity and assistance to hold up asset prices that the reality we are living in now is a sugar high of enormous growth ahead in the next few months based on current stock prices. The sugar high is limited as the central banks can only support the asset prices for so long before trust in the system is broken and no amount of liquidity will be able to prop the system up. Deflation would set in place as assets are rearranged to fit reality.

In the financial crisis 2008/09 it took almost three years for stock market to recover back to even. Assuming the current market highs are yet to be hit there can be possibility of similar consequences now as back in 08. The stimulus and assistance can only go so far before the whole system begins to fail. We are witnessing this occur in the black lives matter movement where citizens butt heads with police officers. The confrontations are having a ripple effect on the real economy. Rioting and vandalism has force businesses to stay close and citizens restricted in doors under curfew.

With so much head winds there is greater possibility that the end will be a similar fate in 08 for the markets. Rather than predicting a massive drop in stock prices it is easier to predict volatility. Volatility in a way that due to the underlining uncertainties there will be more insurance bought to de-risk even if sentiment is bullish. If the punch bowl never goes away but assets prices deteriorate there will be enormous volatility.

How to profit from volatility?


The simplest is to sell naked calls/puts to collect premium since higher volatility means higher option prices. To limit the risk purchasing the underling asset. I am thinking of going long spy but selling deep in the money calls a few weeks to months out. That way if a drop in markets due occur I would collect a premium and be holding the asset at lower prices. Drawback to this is if the drop is greater than the ITM calls. So no trade is risk free.

Posted Using LeoFinance



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