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Day one: our potential VIX trade

Potential strategy: Buy March Volatility index at 15.5, stop loss at 13.5, profit target 19.0.

The index seems fairly well supported between 14 to 15, so we should see this platform hold and stage a rebound this week as a number of macro concerns ramp up.

The referendum to be staged by the people of Crimea this coming weekend could have important ramifications and we’ve heard of Russian forces increasing their presence in Crimea again. Russian gas giant Gazprom is owed $2 billion from the Ukraine government, so ironically even if the IMF do lend money to Ukraine we could see much of the money going to Russia.

It is also being reported that Russia may stop fulfilling arms treaty commitments and block US military.

In China we have seen the first corporate bond default in its history and a number of commodities such as iron ore futures and copper were sold off aggressively on Friday. Poor data over the weekend (in the form of its exports and inflation) could also have an impact not just on commodities, but also hit the emerging markets as well.

Price action in the S&P 500 is also looking more vulnerable, having printed a doji at the all-time high, highlighting the indecision seen in the market. Clearly a pullback in the S&P 500 would help push the VIX higher as traders increase buying of put options.

In an article in the Financial Times, Seth Klarman (one of the world’s most respected investors), suggested that investors were underplaying risk and were not prepared for an end to central banks bond buying program. Mr Klarman has a huge following globally and when he talks about ‘nosebleed’ valuations on companies like Netflix and Tesla, traders listen.

Volatility index (VIX)
Volatility index (VIX)

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