+239% YTD on COVID-19: Next Steps

Atikon said:
The Question is, what is he/she trying to sell
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Oh brother. I've seen a lot of that crap on ET, too, so I can forgive you for being cynical, but honest to goodness I'm just looking for a discussion on the topic I originally posted:

What areas do you consider to be the best value right now in terms of reward/risk given the thesis the market will take another leg down due to Covid-19 over the next several months?
 
Statistical Trader said:
Oh brother. I've seen a lot of that crap on ET, too, so I can forgive you for being cynical, but honest to goodness I'm just looking for a discussion on the topic I originally posted:

What areas do you consider to be the best value right now in terms of reward/risk given the thesis the market will take another leg down due to Covid-19 over the next several months?
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Honestly, I made a case for shorting Biotech/Pharma ETFs bc they shot up way too much when the scope of COVIT emerged. Made a thread about it. I posted in another COVIT Thread that I think WIX.com and SquareSpace should get a good boost from businesses who have to go online or die during the Lockdown. You can go down the value chain, I went Long Paypal+Visa as well since ppl paying less with cash atm (cash is way more common in Europe than in the US).
 
Ok I'll bite. There's a significant section of credit that hasn't been backstopped by the Fed. Said credit has rallied quite a bit since March lows. If there's another leg down these should go hard.

HYG, SRLN, PFF.

There's also non agency RMBS but you have to be careful there. These are likely to be backstopped. Also, good luck trying to short these as retail.

Your thesis is actually rather simple. Find crap(credit/equities) that has rallied off March lows that isn't being backstopped by the Fed and isn't likely to be, that is highly leveraged with debt.

SPG, smaller oil/gas producers.

You want an analog, look at offshore oil drillers since 2016. Find the current analog.
 
tsznecki said:
Ok I'll bite. There's a significant section of credit that hasn't been backstopped by the Fed. Said credit has rallied quite a bit since March lows. If there's another leg down these should go hard.

HYG, SRLN, PFF.

There's also non agency RMBS but you have to be careful there. These are likely to be backstopped. Also, good luck trying to short these as retail.

Your thesis is actually rather simple. Find crap(credit/equities) that has rallied off March lows that isn't being backstopped by the Fed and isn't likely to be, that is highly leveraged with debt.

SPG, smaller oil/gas producers.

You want an analog, look at offshore oil drillers since 2016. Find the current analog.
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I like the Idea! Since the FED said they would even consider buying Equities and even got the go ahead from the Directors, how would you choose that Debt?

Also isn't it possible to buy Options on CDS on High Yield Bonds? Should pay more than Shorting ETFs
 
Atikon said:
I like the Idea! Since the FED said they would even consider buying Equities and even got the go ahead from the Directors, how would you choose that Debt?

Also isn't it possible to buy Options on CDS on High Yield Bonds? Should pay more than Shorting ETFs
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It would take another major selloff for the FED to step in and buy equities outright. Which means the shorts would have paid off.

The FED isn't buying high yield/junk currently so the biggest issuers there would be the targets if shorting the equity.
 
Statistical Trader said:
LOL. Maybe.

If anyone is interested, though, here's how I played it. I have a recession model and a volatility model. I spent months building these models, years monitoring and using them, and I've built them carefully. I have an advanced degree in statistics.

My recession model is based on 100 years of data and correctly anticipated every US recession except one using leave-one-out cross validation (ie it's not "overfit"). It also gave no false signals (ie never said there would be a recession when there wasn't one.) It has been anticipating a US recession since the winter and in mid-February put the probability at 66% (ie 2/3 of the sub-models said "recession").

My volatility spike model isn't perfect, but it's pretty good. In late February, it said there's a high chance of increased volatility ahead.

So, putting those two things together, I thought IF my thesis is correct that we're heading into a crash, what is the best way to express this in the market right now in terms of reward/risk ratio? VIX call options were cheap at the time, especially OTM. So I bought VIX calls at strikes of 20, 25 and 30 with expiries running from March to September, with a heavier concentration in March and April. If there were any sort of downturn at all, I would profit on those strikes and I got lucky that the VIX spike was as strong as it was.

Now I think that there's a reasonable chance that we have more downside ahead. VIX options are no longer attractively priced in my opinion. I have some ideas where I think the best reward/risk ratio might be moving forward, but I'm interested in others' opinions too.
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thanks for the insights. I am considering becoming data scientists so I really love your approach to this.
Can I ask 1 more question?
Does your model rely on economic data or market data or both combined?
 
Statistical Trader said:
CONTEXT

I have robust models for anticipating major changes in volatility and for anticipating recessions. Using them, I exited my long-term equity positions earlier this year and in late February and early March put a portion of my portfolio long OTM VIX calls and VIX futures. I’ve now closed many (but not all) of these positions.
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What kind of methods do you use for modelling? Regression, Machine Learning?
 
Well FED just backstopped everything. If you are still looking for downside R:R plays, I'd be looking at sectors that aren't going to recover fast from this crisis and look for the most heavily indebted companies.
 
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