Debt Limit Doubts

  • SumoMe

OK, for the record I despise politics (almost as much as I despise politicians) and so I am not really interested in writing an op-ed piece regarding the debt limit showdown.   So whichever side of the debate you are on – fine by me.  My interest is in how all of the recent DC shenanigans will affect the financial markets.  Here is my observation – presented solely as one man’s opinion:

The democrats see this as a golden opportunity to really hurt the Republican Party.  Any and all proposals that have come from the GOP are being dismissed out of hand.  It seems that the Dems figure that if they push this thing up to the 11th hour the GOP will ultimately have no choice but to cave in or risk being blamed for a possible U.S. default.  And they are probably right in either case – i.e., either the GOP caves or they don’t and we default and the GOP gets the blame.  So don’t expect the Dems to give in unless they somehow feel they have no choice.

Now if it sounds like I am blaming [your preferred political party here], the cold hard truth is, I don’t care.  Whatever your political reaction is to my statement makes no difference to me because I am not attempting to offer a political opinion  You can love or hate Democrats all you want, or you can love or hate Republicans all you want, whatever.

Here is what does matter to me:  All of the actions taking place in Washington point to this thing dragging out the very last moment – and maybe beyond.  So prepare for a lot more fear and loathing in the next several days.

My advice to investors:

1) As I have been highlighting a lot recently, considering buying VXX call options.  As fear rises so does the VIX Index and so does the price of call options in ticker VXX (an exchange-trade fund that tracks the VIX Index).  Don’t “bet the ranch”, just buy enough to make some money if everything in fact goes to heck in a hand basket.

2) If things do get scary and if the call options spike, consider taking some profits prior to the debt limit deadline, and the rest of the position “ride”.

3) If there is a favorable outcome (i.e., the U.S. does not default on its debt), the VXX call options could easily collapse in price, hence the reason for taking some early profits if they become available.  If there is not a favorable outcome, a long position in VXX call options stands to be one of the biggest winners around.

In recent articles I have highlighted the VXX Nov2013 14 strike price call.  At this moment, for investors looking to establish new positions I would look at the 15 strike price call which appears to offer a little more “bag for the buck.”jotm20131014-01 Figure 1 – VXX Nov 15 Call option (courtesy www.OptionsAnalysis.com) jotm20131014-02Figure 2 – VXX Nov 15 Call option (courtesy www.OptionsAnalysis.com)jotm20131014-03

Figure 3 – VXX (courtesy www.OptionsAnalysis.com)

Jay Kaeppel

 

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