On August 11, 2017, I wrote an article saying that I was betting against war with North Korea.
The talk of sabre rattling with North Korea spooked the stock market at the time and the S&P 500 fell 1.5%, which was the biggest one day drop in 2.5 months. I took note of that because the move was bigger than 96.5% of the time over the previous 5 years.
The market gauge of volatility compelled me to act. The VIX index that measures the short term implied volatility of the S&P 500 jumped 44% in one day. I created a histogram of returns and found the following (on August 11th):
The thesis I came up with was that the fear of war fallout risk with North Korea was overblown and that volatility would mean revert in the near term.
So the bet I made was to buy XIV, an inverse volatility ETN. I took a $5,000 long position in XIV and ended up doubling my position to $10,000, getting in at an average cost basis of $75.60/share.
To our good fortune, the world has not ended due to nuclear war with North Korea. While people still remain somewhat fearful, rhetoric has remained just that; rhetoric. At the time of my article, VIX had spiked above 16. Fast-forwarding to the present, the VIX has drifted back down to 10 as of Monday.
The XIV, meanwhile, has marched up from a low of 71.50 on August 17th all the way to 103 as of Monday.
Given that the VIX has moved within all-time lows, I’d like to go ahead and end my bet publicly. To be fully transparent I closed my trade weeks ago to move on to other things, but I wanted to also do so “officially”.
Although I came out pretty well selling at $82.55, hopefully others have done much better. The move from $75.60 to $103 is a 36% gain in less than 2 months! A nice stroke of fortune to be sure.
Until next time, have fun. If this has caught your eye, keep an eye out for future trades.