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MKM Partners derivative strategist Joe Strugger on strategies to boost investors’ portfolios.
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For most investors low volatility which is what we have now means complacency.
Now in the past complacency it meant a market correction was imminent -- -- see some big fall because things look to calm but one expert says take advantage of the low volatility environment.
And get what he calls directional exposure to stocks but remember slow and steady wins this race he's changing.
The parameters here -- -- -- KM partners derivatives strategist.
He joins me now Fox Business exclusive with some advice on how to best play the low volatility card but you -- the old model on its head don't you.
Well exactly.
So the last five and a half years we've all -- come to live with this elevated levels implied volatility people know.
If they look at -- there's been -- indebted floor in the mid teens we think that's over so that shocks that we've experience of the last five and a half years we think going -- become more muted.
The faster people become comfortable that can begin to utilize what the option market is giving up the more they'll get to participate on the upside.
An -- you -- some historical examples going back to the ninety's and going to affect the mid two thousands where there were similar patterns or where are you getting your thesis now sure.
So we have thirty years of data implied volatility that's really when they started.
Trading options and what we know is that in periods that we've just come through for example the S&P 500 moved on an absolute basis about one point 1% -- day.
In these prior historical low volatility period that's closer to half.
Percent OK so there was that like for example 1991 okay we're looking at something different here the S&P 500 index are seeing a lot of calls vs what's.
That is a bullish signal now here's the historical picture here during low volatility regimes how the S&P 500 performed.
Quite beautifully from 1991.
To what nine.
2003 to 2007 so you're saying.
Throw out the old model of expecting some horrific correction to expect any kind of correction will be -- at what would it look like.
-- will go deputy corrections one important point you -- 1991.
2003 it is important correlation with underlying economic cycles there.
You had recession troughs in 91 and then in 2001.
You tighten -- this psychological shift occurring within the first couple years of of economic expansion.
We're three and a half years post the June 2009.
Troughs of the timing in that regard.
Is correct.
As far as corrections -- we're probably looking more in in line with sort of six -- 8% correction going forward rather than the twenty to thirty we've seen his story.
OK so six to eight -- -- -- -- it now let's look at the behavior of the markets lately some pretty Smart investors have jumped on the call.
Meaning they bought calls and you can see anywhere from a couple of days to two weeks in advance of earnings coming out on certain stocks.
Their average return folks listen to this the average return on that 18% that's a trade that's been working beautifully doesn't contain.
Well -- part of this thesis is that with implied volatility.
Correlation is also lower that means dispersion price is lower that means stocks move on their own merit something we haven't really seen.
Over the last few -- now finally they're moving on good numbers but -- have to figure out how to pick the stocks it will probably a good earnings reports correct that's right also 2.0.
You know if you look at the volatility products after the fall 2008 people who were long -- -- options for example calls.
Into the super spike that we saw at that time.
But made a hundred times their money beautifully you can look at something like it's a little bit of -- per believe but Netflix earnings right stock was up seventy some odd percent post earnings.
There are people who made forty times their money.
As stocks dispersed or if people will be attracted to litigate broken yet and that's gonna continue so let's guide everybody which sector should they be looking -- -- that -- -- work so broadly we're really put pro cyclical.
In addition to that from a valuation perspective.
We're really focused on technology and financials we think they look.
Particularly attractive and nice way to get you know exposure on the long side into -- year look in June for example implied volatility as we've said.
Is low that means options are pretty cheap.
So in excel left for example you could -- nineteen strike calls don't have to do anything fancy.
XLK 15% of that is that.
-- -- and your ear -- the year strike.
Time would be June June polluting -- is exposed sit on air clear -- -- while being a little nervous about how it will play out and then you'll get how many times your money.
Well it's a great question you tell -- -- excel left necks out and dig -- -- thing we think again that progress will be slow and steady higher.
Again this in nice way to participate particularly if you think of correction is right in front of -- Jim good to see you thank you thank you very bright so he's saying you don't expect a gigantic correction here just because volatility is love thank you so much.
Did -- prison camp partners derivative strategist closing bell.
