Coffee and Options. Market, volatility and other stuff (Jan 28 2023)

While we see long term vols come off precipitously, we are still in the “covid range”, meaning higher than where we were in 2019. But still, we have come down from the upper end of the range of covid vol rather quickly, which is sobering for market bears IMO.

Something has reset, whether it’s the anticipation of the end of the Fed hike cycle, a soft landing, whatever, something has brought in long term vol fears. Something has taken doomsday off the table. It’s a bit like longer term rates being lower than where the Fed rate rhetoric is – bonds are calling BS on the Fed and saying rates will drop – the long end is speaking to us. Long vols are kind of doing the same, so we listen. Now, VIX is still high-ish, so the question is does VIX start to also reprice lower.

The trade may be longer duration protection against your long equity positions. It’s hard to pass on that massive drop in the cost of protection. Maybe the market keeps going, maybe not, but from a vol perspective this could be a kind of inflection point. A lot of people are bearish and waiting for that last dip to 3500, cash is extremely high, so maybe vol is telling us that there is a “cash holding” put in the market right now – a lot of managers have been caught offside and the rally since the December lows is concerning to them. Unemployment is low, folks have jobs for now, earnings numbers so far are mixed but not disastrous. We’ve gone from outlooks of “hurricanes” to softer landings. We’ve gone from a 50% chance of recession to 15%. We’ve taken worry out of the picture to some large extent and vols are reflecting that. But we’re not out of the woods yet, and we may yet see a deterioration in the economy as the lagging effect of rate.

hikes work their way into a world that had an unprecedented cash influx. Warnings from the likes of MSFT shouldn’t be ignored and we are only really starting to see the indigestion of equally unprecedented rapid hikes. So, given the backdrop right now the market sees the glass as pretty half full, but vigilance is also required and vols are giving us a great chance to top up protection going forward. At Gamma we can help you build an overlay vision that works for you and your clients.

Hans Albrecht, CIO and Portfolio Manager, Gamma Capital Advisors

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