Investors should lock-in half the profits gained after summer volatility but not close out positions on the VIX entirely, as there is plenty more turbulence coming towards the end of the year.
That is according to Loïc Schmid, head of asset management at Geneva Swiss Banque, who highlighted how the VIX has surged from 13.05 mid-July to 20.29 mid-September.
This was due to sharp moves in interest rates, Schmid said, which is backed by a host of macro headwinds.
This tactical approach to protection comes as Greek debt problems are ‘back on the table again’, according to the manager, who also said international uncertainties over interest rates and the credit market will grow.
Geopolitical tensions between the US, China and Russia, as well as the ‘beginning of the end of Merkel’s era’, could also all contribute to heightened risk, he said.
Rounding out risk events, Schmid added Italy’s upcoming constitutional referendum and doubts arising over the longevity of Uber and Tesla, both viewed as the engines of the US tech boom 2.0.
Meanwhile, high valuations of US markets and concerns over Hillary Clinton’s possible health problems also indicate more life in a VIX position, Schmid said.
This echoes one of Schmid’s July ‘Idea of the day’ charts, in which he promoted buying protection as the volatility caused by Brexit had begun to calm.
Still, it indicated future potential headwinds including the Italian constitutional referendum, issues surrounding Italian banks, Deutsche bank nationalization and Chinese credit risks.
The chart pointed to GS Banque’s early summer VIX trades which saw it buy the index on May 27, prior to Brexit, sell half on the June 15 as volatility grew in anticipation of the vote and then sell off the remaining holdings on June 27 during the index’s highest spike.
‘Buying cheap protection is like buying a €3 day ski insurance which can easily cover €10,000 worth of medical treatment and the helicopter ride in case of a broken hip.’