Thursday, October 20, 2011

Recap - Trade Performance + 50%, Pain Trade thesis still intact.

Recap - Trade Performance + 50%, Pain Trade thesis still intact.

Recently we looked analytically at developing a pain trade thesis.  To review, we asked

What is the max pain path in the market short term?
  • Up
  • lower volatility levels
  • Raise in longer dated vols
  • Europe/SPX spreads blowing out
  • Interest rates raising
  • Gold/Defensive stocks sinking
  • Financials/Materials raising
  • IWM sinking and Blue chips outperforming

Our trade of choice was to buy calls on XLF, which we traded for a +50% return

In addition, the market had a major rally, volatility levels collapsed in absolute terms and the curve had a massive shift.

Our pain trade thesis is still intact, we continue to see elevated levels of index dis-allocation

Over in Europe, we picked up how during the sell-off, markets started to pay very little premium for Euro Stoxx Var over SPX (traders rushing to unwind the spread and keep whatever profit) have again started to blowout as nobody was left on the margin to sell.

PFG believes that the speed of the current rally probably as well reflects the speed at which market participants have worked to get back to correct weightings.  This makes finding volatility edge tougher in the market.   Our next trade will have to come as a re-active bet from another dis-allocation.  PFG anticipates this should become more visible as we approach year-end and traders will clean out books to start a fresh year.

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