Powder keg. Fuse lit….

Posted on Dec 13, 2010 by in Letters

We have been itchy lately, feeling like something is about to blow.  You are undoubtedly aware of the famous stories about Soros, who gets a bad backache when his positions are on the edge of trouble.  This is actually the same feeling we had back in April, right before the market fell over the cliff.  And if you look at this chart of the VIX it should catch your attention.  It's getting back to that April low.  To remind you, volatility reverts to the mean--sometimes violently.  One thing professionals do when volatility gets to historic lows is buy straddles.  We did that in the 1987 crash and made a killing.  Straddles, of course, is a bet on a big move, long or short, because you're long a put and a call.  In the present case we think there is a ticking powder keg but we're wondering if the explosion is going to be to the upside rather than the downside.

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