I still like calls on treasuries on bounces - I made a killing doing that this week. That said, RP is right that equities have not even reacted to this bond moves, so there’s a lot of upside in that short trade.

I cant comment on risk management. I can tell you that there are a substantial number of rate cuts priced into the ED curve. Bear in mind that there are scenarios where the policy response is shockingly big (zero rates) which rescues markets like HYG, at least in the short term. https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

Its tricky to know, just do what you are comfortable with but the bigger Risk reward is being short equities and credit right now...

Thank you

40% vol implies about 2.5% move per day. That has been markedly less than the markets actual moves. Agreed its a lot in the broader context.

You have to pay to play in a market like this...

*If you assume that volatility is going down soon. But what if it stays there for a month or two? What if this price elevation is a new norm?

Thanks gents, really appreciate your input, was very helpful. I feel it's almost late for the SPX/SPY trade, but I went ahead and created a limit order for SPY and ES options.

One point I would make is to consider best and worst case analysis. Imagine if HVG reverts to its pre-CV19 level. How much would you lose? Is that loss one you are prepared to accept? If it is then fine. If it isnt then adjust the position till you can accept the worst case loss. Bear in mind there are no absolute answers.

SPY options are the most liquid, I play ES mostly as not allowed to trade SPY underlying either long or short as European retail (but we can go short a naked option total bonkers)

Try SPY for etf, or ES for futures on IB

Im indifferent. I just chose HYG...

Who the hell knows! It is a different world that none of us has death with before...

Both, or either or. Im showing here that I have high conviction.

Nope or IG CDS if you are institutional...that should work too.

Sorry, saw the same question answered below. Cheers!

Yes. Im very bearish smaller companies in the US because there is no mechanism to funnel money or assistance to them like in Japan. I would keep an eye on BIZD, as an index of credit performance in the space. Its not something I would short cos a) Its moving. b) its very high carry, but maybe I am too conservative. Its definitely one of the epicenters of credit deterioration. I suspect these companies are relatively tightly held and dont have a lot of speculative interest, which is why they are not breaking down as quick. That and you cant sensibly short them.

Im too macro to be very well placed to answer this Im afraid.

Good question. I think IG gets to 250 before the Fed has to panic in. They might do it via injecting money into state pension plans.

HY OAS +494 bps (apologies)

We are there... the is the crash point if it plays out

Or is point 27 where we are currently on the adjacent crash pattern chart?

BTW!!!! I would love to see John Hussman on Real Vision!

You wont have an issue with a long put position unless you keep the short beyond exercise. The market maker who sold you the put might have a problem, although one would hope he works for the firm who sponsored the ETF, which would mean he would have no problem running a short hedge.

Try JNK too. It means that many hedge funds have the same idea and are trying to short the stock. Option market makers need to borrow the stock to hedge against you buying the puts..

could try sjb i was told the hyg was unborrowable so bought sjb

Merrill gives me a similar message, on occasion, so I use my interactive brokers account when it pops up. I called Merrill, they said it fluctuates and occurs when they don’t have sufficient volume. I suggest calling your broker, they’ll help you.

Unlucky... Try IB, I Had No problems putting it on.

I put them on on Thursday but at 85, didn’t have a problem with it though. There might not be a lot on open interest at 75... I don’t think that HYG has been below 75 for at least the past 3 years

Sorry this was supposed to be for the comment below

I got the similar message when I tried to add to my short JNK position on Friday. I trade with Schwab too. Not sure if this trade might be too crowded already. Is shorting individual stocks from JNK list which are most probably will be downgraded is another way to play it?

Corey - I agree. But I think there is a lot of juice in HYG and SPX puts too.

Chiming in from S.E. Asia. Agree re Fabian's point above; however, I keep coming back to the conclusion that all roads should lead to EDZ 100. Reason being--as Raoul put it, "the reaction function of policy makers". This is the first time since 1918 flu (when no traders in NYC/CHI, etc. nor policy makers were alive) where the US faces a structural and systemic shock--pandemic. We "Americans" do have great individual doctors/ labs (CDC)/ specialists, etc. but we do not have a great cohesive system. Historically, during Ebloa, Lassa fever, SARS, MERS, etc. our great doctors (and traders from afar) could fly-in assist the locals and fly out. Thus, we could be specialists for the discrete problem--we never had to deal w/ the large scale infrastructure and gov. policy response part of the equation. Fast forward to today --we have the specialists, but the rest of the necessary parts have "never actually played on the field" so to speak and I think this is what is playing out. Couple this w/ the first time that any financial professionals sitting in NYC/ CHI/BOS/SF/LA etc. will have to grapple with "their" mom, dad, wife, son, daughter, etc being subject to some exotic virus and walking out of their own home/flat/condo--into a martial law scenario---I think the market is nowhere near pricing in the hit to the "psyche"/reaction function of the people on the ground because this is the first time---in a long time--that the American people are the "people" on the ground.

Im struggling with it in the same way you are. You can't have a steeper curve without negative rates. If that is the case just buy 100 strike Eurodollar options. They are priced for a speculative bet but its highly speculative...

There is a lot to be said for buying puts with different strikes and expirations. Of course there is a risk that the authorities will seek to "save" markets. In many respects its exactly what they should be trying to do. The question is whether they can succeed. I think one answer is yes, but they will need to adopt measures which are ideologically at odds with Americas self-image. That might well delay the necessary measures.

Hi Raoul or others wiser than myself, Following on from James K., I have brought as you suggested, though was wondering if it's worth buying a variety of Puts at different Strike Prices and Expiries (risk management)? Also with regards to selling the Puts for the SPX and HYG, do you have a level you are expecting to see or a strategy in place to exit, are we talking days or weeks (I know Ray Dalio has written about a big effect but one that is short lived)? What happens if the FED does some funny business and stops some of the natural downside you see? Please don't think I'm after the Crystal Ball answer, just curious to your thinking and strategy. I'm new to this game and have been lapping up everything thats been flowing through RV for the last 6 months, thanks for the education.

I just think that the next phase - panic and economic realisation hits by June and by then there will be stimulus plans etc and a summer lull in the virus progression. So, finger in the air really. The 1929 chart helps guide me too.

They are cheap if the move I expect comes - or just sell futures..

Ivan - It feels right to chase...agreed.

Raoul, with the market in limit down soon after opening, do you chase shorting opportunities in S&P 500 Futures or you wait for things to settle down a bit? It feels like the right thing to chase...

Bid/ask spread on ES June closed up as soon as market opened so please ignore my novice question...

Im afraid i just don't know... its to ugly a market to be long ny equities at all I think.

At time of writing HYG is down at 80.84. I would argue it still has room to fall further. The situation in financial markets is, if anything, far worse than the superficial appearance, which is pretty bad. The situation with Covid19 in the US is also far worse, than the general understanding.

Just saw your comment below that it feels right to chase.

IMHO, Covid19 is responsible for 80% by a cumulative process of slowly undermining confidence in the growth prospects of stocks. The collapse in oil prices hurt hedge funds who were involved in oil. That would have damaged some funds ability to take risk elsewhere. Its also true that a sizable proportion of the US economy is involved in oil extraction. Not as much as in the past but a fair amount still.

I think the credit trade does that. Being short EU banks only exposes you to short selling bans etc... best avoided.

You wont be ahead of it now. But you might take the view that it has further to fall. The SX7E (an index of European banking stocks) was at 102 on Fed 17. It is now at 65.04. This is the low since 2010. But it does put into perspective just how dangerous credit is right now.

If you can find a "tail" of the distribution you are happy to sell then yes. At least more so than before. One thing high vol does do is it makes strategies like spreads or ladders more attractive. I might be tempted to sell a call ladder on the S&P or a call spread. The latter has limited downside. However I would be quite nervous to sell a put ladder on the S&P. I can see how things might work out much worse than many expect.

Forgive me for answering for Raoul, but I really don't think so. So lets just assume we have a significant infection rate in the US. The policy response would need to offset a serious slowdown in Main Street. But definitionally, that (social distancing) is precisely what will be required to slow the transmission of the virus. It may not be obvious in the first few weeks, but many businesses will eventually lose a certain amount of revenue because of social distancing. Its unlikely that government can fully compensate for it. That implies an inevitable degree of credit deterioration. Fed stimulus wont fix it cos they cant get money to Main Street. Government stim will only partially compensate (at best) and probably requires some degree of bipartisan cooperation. How soon can this happen? Well, the announcement can be very rapid. But implementation will be much slower and much more uncertain. The President has already mentioned a possible payroll tax which is already being played down by his staff. Expect more of the same. Getting new stuff done is hard in Washington cos of the coming elections. If you ask me, there is probably a stealth run on credit already underway. It might explain some of the pressure on money markets that is being reported.

for the next few weeks, yes. After that we all have to trade the psychology of huge support packages etc so we might see the narrative shift again.

Vol is coming down. Seems an inspired call to me. However the question is what to do next. I hate betting on the end of the world, cos who will you collect from? On the other hand, the estimates of the GDP contraction are between 10-20% Thats pretty extreme.

You would have to look way out the eurodollar curve to get a sense of that. Front eurodollars is at 55bps as I write. Fed funds is at 0-25. So there is a risk premium for unsecured libor financing. When I look down the ED curve, I see that we dont get above 1% till Sept 2025. Which, incidentally, seems extreme to me.