I Have Started Buying Protection

How I’m Front-Running the Summer Stampede

Good afternoon,

Yesterday’s post was titled A Violent Market Pretending to Be Calm for a reason. SPX has managed to sit near the highs with VIX in the teens while the average stock moves like a madman, and entire factors suffer corrections that would normally come with a much uglier index. It has got away with it because the pain has happened in different places on different days. Semis rally while software gets smashed, Mag7 recovers while momentum unwinds elsewhere, and the opposing moves cancel each other out by the closing bell. That works until it doesn’t.

The bit that worries me now is what happens if all these supposedly different trades start moving together. Implied correlation is sitting around historic lows, so the options market is still pricing the offsets to continue. If correlation rises, index vol catches up to what has already been happening underneath it, and everyone discovers at roughly the same time that their book was less diversified than they thought. Add summer liquidity, high gross, levered ETFs and systematic sellers to that, and a fairly ordinary first move can turn into something much nastier before the fundamental explanation has even been agreed upon.

I don’t mean another 1-2% wobble that gets bought before lunch. I think there is a proper 5-10% air pocket lurking somewhere in this summer, and I have now started paying for protection against it. Not a token VIX call or a put so far out of the money that it only works if the world ends. I want something that begins working early enough to be useful and leaves me with cash if the index gets anywhere near 7,000.

Here is exactly what I have done and how I intend to manage it.