Before we get to our regular programming this week, I wanted to briefly touch upon the macro environment and the significant market turmoil we experienced last week. I wrote down some brief thoughts last Friday about my experience navigating both the 2008-2009 and the 2020 bear markets in a tweet here and one of the questions I received was about insider buying during a period of crisis.
My response is given below:
Last week, the insider sell/buy ratio did get down to the 10 level and I think it will go down even lower in the coming weeks. The insider purchase we are discussing this week happened in the midst of this turmoil when a well informed insider with a long history in his industry decided to make a purchase.
Beyond looking at insider purchases for sources of ideas over the next few weeks, there are a couple of other tactical trades that are worth considering.
Tactical Trade 1
The first one is a mean reversion volatility trade I discussed in a mid-month update titled Volatility and Howard Hughes. Times of crisis and heightened volatility offer this setup, which I outlined as follows:
“The trade involves buying out-of-the-money long dated put options on the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX). There are two factors at play in such a trade including the fact that big spikes in volatility almost always tend to revert quickly. We saw this in 2008, we saw it in March 2020 and then once again last week.
VIX Peak in 2008
The second factor at play and works in our favor is that ETNs like VXX tend to have a large tracking error compared to a volatility index because they attempt to track the volatility index by buying futures. When the VIX is stable or declining, the futures are priced higher and VXX ends up paying a premium to keep up with the index.”
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