Trade Ideas | 10/10/18

October 10, 2018

So it's October and as usual, welcome back to volatility! The major indices are shedding a lot of their summer gains today, and that's driving up the $VIX and implied volatility across the market.

 

Today's Ideas will be divvied up differently; instead of high, low, and directional, they will be listed as follows:

 

Higher Risk

 

$EWZ - Treat the Brazilian elections as "earnings for Brazil" or as a binary event. Most people expect Bolsonaro to win the run-off (2nd round) and become the President in the elections held on October 28. Bolsonaro is seen as good for the economy and for the state-owned oil company Petrobras ($PBR) because he wants to privatize many parts of Brazil's economy. Haddad is seen as bad for the markets and the economy because he is a socialist. So, if Bolsonaro wins, I expect $EWZ to rise moderately, not blow-out to the upside, because Bolsonaro is already "priced-in." In that case, IV crashes and big money is made from being short Vega. However, if Haddad wins, there is a good chance that $EWZ plummets as that is not expected and IV will still probably fall, but less so. Either way, a trade here isn't for the feint of heart. 

 

$BABA - Tariffs and trade wars have wreaked havoc on Chinese stocks and $BABA is not left unscathed. However, the stock is quite oversold and is at the 100th percentile in IV, which is hard to ignore. If you feel like trying to catch a falling knife, put premiums are beefed up right now just waiting to be sold.

 

 

 

 

Lower Risk

 

$USO - More of the same when it comes to this underlying. You can trade an Iron Butterfly for about a dollar, putting your breakevens at 14.50 and 16.50. These trades have been hit and miss for me over the past few months, but when they lose, it's never very much. Worth a shot in my opinion.

 

$RSX - Emerging markets have had it rough lately, but Russia is trading uncorrelated to $EEM. I think an Iron Butterfly is a decent trade here, especially since you can risk less than $100 and still have a chance at a decent profit if $RSX trades between 22 and 20 for a few weeks.

 

$GDX - Gold is surprisingly not trading way up even though markets are slipping, which tends to be the case. Either way, IV is pumped up in the gold miners again and so selling an Iron Butterfly wouldn't be a bad strategy.

 

$BBBY - This company just had a big earnings miss, but even though earnings were released a week ago, IV remains high. Again, selling an Iron Butterfly here isn't a bad way to go.

 

 

 

 

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