‘We’re finally starting to see the VIX wake up,’ strategist says
RBC Capital Markets Equity Derivatives Strategist Amy Wu Silverman joins Yahoo Finance Live to discuss volatility, stock futures, hedges, the state of cryptocurrency, and the outlook for investors.
Video Transcript
- What do you do in the current market? To answer that question, let's bring in Amy Wu Silverman, who is the RBC Capital Markets Equity Derivatives strategist. And particularly here volatility back in the equation. You have actually talked at length about the VIX finally waking up here. So with the volatility certainly over these past few sessions being taken into notice by investors, where do people go to?
AMY WU SILVERMAN: Yeah, it's interesting, because even from a couple of months ago, we've been talking about how volatility has really underperformed what we know is going on in terms of the Fed starting to lose accommodation. And we're finally starting to see VIX wake up above a 30 handle. And that vol of vol, your VIX volatility, is moving sharply.
I think investors still should consider hedges. One thing we talked about early this year was that the first 15% selloff in the S&P was actually quite orderly because investors had hedges placed. Now, if there's another significant leg down or even a swing to the upside, that kind of second derivative mood has not been priced in. We've seen tails very low in the market. And the options market was just not positioned for what we saw on Friday,
- Amy, are we just witnessing right now in the premarkets what we're witnessing in crypto? Is this just a small taste of what is likely to happen as the Fed goes off and hikes rates maybe close to 200 basis points by the end of the year?
AMY WU SILVERMAN: Yeah, and I think you're seeing that. And I'll give you some examples that we see in the options market. We're starting to see after that CPI print really, really extreme tails. We're talking 100-to-1 market down another leg, 10% to 15% start to be played, which was not the case a month ago.
And I think you're going to start to see more of that, because really, what do you do in this market? You either derisk, degross, or you have to place some sort of bet to protect yourself when potentially CPI surprises even more. But that being said, when you look to the flip side, another risk for investors who have derisked and degrossed, if things start to get better, how do you participate quickly in the market? That's where derivatives come in, because they help you with the more tactical positioning that you have to do in this market, because the whipsaw is real and the nimbleness factor is one that can't be underestimated.
- Yeah, most definitely. So in all of these cases, then, what do hedges look like? What should people, how should people be thinking about playing both sides here?
AMY WU SILVERMAN: Yeah, one thing we have recommended specifically is to look at put spreads. So this is an alliteration, but we were looking at port strike put spreads. Essentially, if you think about the tails that are in the market, CPI was, obviously, a tail that happened. What's another one?
In early July, all the ports could go on strike. We think that is unlikely. But again, if it happens, that payout is not being priced in. So owning put spreads on your S&P or IWM, is it cheap? No, it's not cheap. Could it still pay out, despite the fact that it's not cheap? Absolutely.
And then on the flip side, we've seen inflection points in China. Now, I know right now they're talking about that there's actually COVID reinfection going on. But a potential upside tail is if China gets back on its feet, there's stimulus there, there's consumer demand and growth there. So we're seeing the opposite inflection point of positioning again in options where people are owning call spreads, so high payouts to the upside in all the related China ETFs-- these are FXI, ASHR, and KWB.
- If we can, let's talk a little bit more about that potential or possible port strike in early July, even though at this point unlikely, would that and how would that exacerbate a supply chain crisis that has already made inventory levels unpredictable and, quite frankly, has added to price pressures that consumers are seeing?
AMY WU SILVERMAN: Well, look, if it happened it would be a debacle. And we joke, when you work in the derivatives world, you just spend all your time thinking about the absolute worst-case scenario, which, obviously, is a low probability. But we have to start thinking about tails right now, because I think what's happened this year is we went into this year with a lot of known unknowns, the Fed being the biggest one. But then a lot of unknown unknowns also happened, so Russia/Ukraine, for instance.
And Powell talks about that. Right? He says, look, there's some of this that we predicted and we're going to get a handle on. But then there was a lot of other issues that came from the supply side that were unforeseen. And that's really exacerbated the situation. This port strike, again, low likelihood, but if it happens is going to cause extreme exacerbation of things that are already in the market, but making them even worse.
- Amy, finally, I want to ask you about crypto, which, of course, we were just talking a lot about and the huge selloff that we're seeing there. Is there anything that you're looking at within crypto? I know optionality, when you're talking about playing things through options, it's a little more limited there. But is there anything attractive that you want to get into in crypto as we continue to see it fall?
AMY WU SILVERMAN: Yeah, I think when you talk about crypto, there's a lot of lead-on effects. So, obviously, it's been a correlated move down. And, obviously, you're seeing a lot of equities that whole cryptos, like MicroStrategy, as you were talking about earlier.
The other thing I would think about is who owns crypto? You know that retail was a big component of the bullish side of crypto. And so if it's going to really take another leg down, what are the other things that retail holds? So this is your GameStops, your AMCs, your long-duration assets. These were all so popular during the pandemic wave.
I think when you're looking for a related play in Bitcoin or crypto as it sells off, you can think about the other things that this cohort holds. And maybe that presents better opportunities for hedges rather than crypto itself, which, again, obviously the options don't trade to the same degree that they would in the equity markets. But these related assets are going to be very correlated, especially on a down move.
