Deploying More Capital

Benefiting from the recent VIX spike

With the recent VIX spike, dramatic underperformance for defensive quality because of the surge in AI and other high-beta themes, the question is whether this marks a return to more typical drawdowns patterns such as the one observed in 2018. Rationally, one would say yes - but the fact is that no one knows.

What we do know is that today’s VIX reading puts us very close to an important threshold for accelerated selling, margin calls… in the names that have been carrying this year’s index rally. So. either we get to that level and see more choppy trading, or it’s a buy-the-dip mentality (as it’s always been since the GFC, except during 2022).

What can also happen: the indexes are going sideways or sell off with a rotation toward other themes that benefit from the long-term stock market return drivers: good growth, high returns on incremental invested capital, and excess cash returns to shareholders. In our non-option portfolio, we’re heavily exposed to that rationale.

In our options portfolio, we’re now at +5.0% since the start of the Substack (December 17, 2024). Indeed, that’s underperforming the index but there are two recurring returns drivers over the next two months: the 1-year setups will benefit from today’s increase in volatility, set to deliver a combined annualized return of 10-12%. Not bad at all. There’s still 200 bps of return to come our way, taking us to 7.0%.

Then, secondly, as we’re now going to be fully invested with a new position (more on that below) - monthly time value in the covered options sold (and to be sold, as we’re now expiration Friday) is now very attractive. Combined with upside in defensive quality, the return outlook remains unchanged.

Let’s now look at what’s going to happen with our positions today.