Below is a chart and brief excerpt from today's Early Look written by Hedgeye CEO Keith McCullough.
Using yesterday’s Oil Vol Spike as an example:
A) Oil Volatility (front-month OVX) went from 37 to 48 in less than 1-day of clock-time
Going “in” on what? I was buying a bunch of single stock names that I don’t want you to confuse with the broader example I’m trying to get through.. To do that it’s easier to just tell you what I did in the headline Commodity (Brent Oil) and Sector Style (XLE):
A) Since my MAX position for a Commodity is 4% of my capital, I ultimately got to 50% of my max by days end
Why 2/3 of the way instead of 1/2 of the way? Simple Answer: Oil’s Vol Spike was above my TREND Signal level and Energy’s (XLE kind) wasn’t. For reference @Hedgeye TREND for Oil Vol = 48.36.
Why not go all-in? I’m not running some bloody “valuation” model here, folks. There isn’t a “fair value” price I go to my MAX at. There’s a volatility of the price.
Since I’m a “buyer on red” first type of player, it took me a looooong time to teach myself to fill the position to my MAX on the way up. As my Mom always taught me, “sweetheart, you can do this.” Lol
How does that work, in practice?
If Oil’s Vol Spike ends up proving to be episodic-and-non-TRENDING in the coming 2-3 market days, Ill fill up my tank to max, but do so, like you do at the pump, incrementally.
What if it isn’t episodic? Well, that’s easy. It’s the beginning of the end for #Quad2… Oil’s Vol Spike will start to TREND… Oil Vol will eventually ramp > 60… and I’ll get my teeth kicked in, publicly.
If I don’t use the same process to get out, incrementally, that is.