Most cost effective way to protect against black swan event?

Maverick74 said:
Yes. There is severe over crowding in the short end of yield curve trade (2/10)s and even 3mo/2yr, these players are holding that front end down and will get destroyed if and when the Libor/OIS spread blows out. When you look back in 2008 when the spread went from 50 bps to over 400 you didn't have near this amount of activity short the front end of the curve. I think funds got too aggressive on the trump reflation trade and now they are stuck holding size in these things. It's probably still a good trade but they are affording one the opportunity to put this on very cheap. Sure beats the hell out of owning downside index protection.
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I don't think that's right. Given that the Trump reflation/aggressive Fed trade is done mostly through downside in various LIBOR products, the mkt is actually quite long LIBOR/OIS spread at the moment (this is also due to large longs in swapspreads).

IMHO, LIBOR/OIS isn't going to be a good hedge at the moment. If anything, you can observe the opposite, as the some of the pain recently came from an unexpected tightening of various bases (quarter end was a total damp squib).

In Europe you could argue that BOR/EONIA basis is too tight, but it does nothing but tighten further as there is too much excess liquidity.
 
Easiest way is to trade a strategy uncorrelated to SPY. Stat arbs tend to trade for wild prices during high vol events (like a large market selloff ). You'd effectively be long vol trading such strategies. The key is to be efficient even when vol is not very high.
 
Martinghoul said:
I don't think that's right. Given that the Trump reflation/aggressive Fed trade is done mostly through downside in various LIBOR products, the mkt is actually quite long LIBOR/OIS spread at the moment (this is also due to large longs in swapspreads).

IMHO, LIBOR/OIS isn't going to be a good hedge at the moment. If anything, you can observe the opposite, as the some of the pain recently came from an unexpected tightening of various bases (quarter end was a total damp squib).

In Europe you could argue that BOR/EONIA basis is too tight, but it does nothing but tighten further as there is too much excess liquidity.
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Weren't you just a few months ago on the runaway inflation thesis that Trump was leading us to. You seemed to be quite confident in your steepener trades (they since got crushed). You were quite confident that banks stocks were going to keep ripping (they have pulled back a lot) even pointing out how you were not long enough in your regional banking ETF. You were telling me how Goldman was going to the moon. Marty, the reflation trade is gone. Yes, obviously this has affected LIBOR/OIS spreads but now you are telling me if this market were to crash, credit spreads are "NOT" going to blow out? I'm all ears Marty....enlighten me.
 
And to further clarify Marty, the question was asked, what is the BEST most COST effective way to get this downside exposure. Why don't you also chime in then on what you feel that is. I'm genuinely interested. I stand by my argument that credit spreads are still the most cost effective way vs the alternative choices presented in this thread. I'm willing to change my mind. I'm still trying to grapple with your "massive inflation is coming to the US thread". I don't think ten year treasuries agree with you for now. Markets are always changing though...
 
Maverick74 said:
And to further clarify Marty, the question was asked, what is the BEST most COST effective way to get this downside exposure. Why don't you also chime in then on what you feel that is. I'm genuinely interested. I stand by my argument that credit spreads are still the most cost effective way vs the alternative choices presented in this thread. I'm willing to change my mind. I'm still trying to grapple with your "massive inflation is coming to the US thread". I don't think ten year treasuries agree with you for now. Markets are always changing though...
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Credit spreads have negative vega. An increase in vol would hurt such a position.
 
quant1 said:
OTC credit derivatives (CDS and such)? I'm a bit confused.
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The equivalent exchange-traded products like Eurodollars over Fed Funds (an analogue of LIBOR/OIS) or TED spread (Two Year futures over Eurodollars, equivalent to short dated swap spreads).
 
Maverick74 said:
And to further clarify Marty, the question was asked, what is the BEST most COST effective way to get this downside exposure. Why don't you also chime in then on what you feel that is. I'm genuinely interested. I stand by my argument that credit spreads are still the most cost effective way vs the alternative choices presented in this thread. I'm willing to change my mind. I'm still trying to grapple with your "massive inflation is coming to the US thread". I don't think ten year treasuries agree with you for now. Markets are always changing though...
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You'd have to remind me, Mav, where I suggested that massive inflation is coming to the US...

As to credit spreads, obviously, LIBOR/OIS has a credit component, but at the moment basis dominated by other things. If you want downside protection, unfortunately I can't think of anything better than otm puts etc in Russell or, failing that, Spooz.
 
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