BROKERS’ NOTES: Buy volatility, short equities

Petri Redelinghuys, founder of Herenya Capital Advisors

Buy: CBOE volatility index (VIX)

Despite load-shedding, the war in Europe, runaway inflation and sky-high interest rate hikes, the all share index is trading near record highs. Given all that is happening around the world and locally, things have been rather steady. Too steady …

First off, CPI data came in hotter than expected in most regions. Second, oil has found firm resistance at $87.35 and is moving towards the bottom end of its current range at $70.50. In line with the US Federal Reserve’s guidance a short while ago, the world is starting to realise that a pause in rate hikes is wishful thinking and we are likely to see a global recession in the second half.  The market is finding it increasingly  difficult to trade higher and things have been very “steady” for some time.

Volatility has been really low, and the odds are good that markets will come down a little in the near future. The first idea is to buy VIX call options. If you get a call with at least two months to expiry and a strike at 24, you will be well in the money if the market comes down (and the VIX trades to the top of its recent, almost two-year range at 34).

Sell: Equity indices

You can short either the Alsi or the S&P 500. 

My preference is for offshore instruments, so I would recommend the SPDR S&P 500 exchange traded fund (which trades on the NYSE under the symbol SPY) for a short position, but for local traders, a short position on the Alsi might yield a good return.