The yield curve recently inverted which has been a strong predictor of recessions over the last 60+ years. I’m not a big macro bettor but I do like the idea of buying insurance/lottery tickets to protect my portfolio from unpredictable events or economic declines. I’m mostly trying to think about bets to put .5% to 1.5% of my portfolio into which could pay off huge in recession scenarios. My list of ideas is pretty boring but curious if anyone has thought of more creative hedges with huge payoffs in downside scenarios.

My plain vanilla ideas:
Long VIX, calls on VIX
20% out of the money puts on SPY/Russell 200/Dow Jones
Puts on high yield debt
OTM calls on gold
Puts on Treasuries

Anyone got creative ideas?

If there's a recession, the Fed will cut rates further. Bet on this with fed funds futures, which are highly liquid and receive favorable tax treatment. If you want a lottery-style skewed return, buy calls.

Also calls on gold will not necessarily pay off if there is a recession.
And treasuries will rally if there is a recession, so you'd want calls not puts there.

Check out TAIL ETF prospectus/holdings for an idea.

Don't have time to dig into it now, but looks like it aims to do some combination of a couple items above.

Correct.

First thing in a real recession will be a flight from risk. There are a million companies up to their necks in debt that will get crushed in basically every sector. And assuming this leads to another round of oil price collapse due to significant reduction in demand, we can finally see all these names holding on for dear life finally tap out. Remember, shorting from 100 to zero makes the same as shorting from 5 to 0.

What would be the best way to play it if you think QE4 has a good chance of happening? I don't see us stopping at cutting rates if there is a recession.

Puts on treasuries? Treasuries will rally through the sky during a recession.

The problem with buying options is that you have to be right about both the direction and the timing. You can always just short ES/NQ/RTY which offer 20:1 leverage, but of course the risk is not defined like buying an option. You could also ZN/ZB, but bonds are already pretty rich.

W/r/t gold.

Gold tends to sell off during recession. The point of holding gold as a haven is that it is always something that you can sell (compared to equities which might have very little value during a crisis).

For short term recession defense, gold is not much use.

Theres a whole lot of things that appear correlated with recessions. Taking one in isolation is a really bad idea. Delinquency on mortgages and credit cards are low. That didn’t happen ever when yield curves inverted. What about energy prices? usually the inversion happens when energy is expensive. The consumer has a decent wage gain thats above inflation…that didn’t happen in other inversions.

Things arent lining up with previous inversions.Times have changed. The US is pumping a lot of energy, they are getting energy cheap from Canada, and they are convincing Saudis and Russians to keep it low.

When Energy is cheap there are never recessions.

I'm generally of the view that you don't need to be a hero/prognosticator - sit back and wait for the news and trade it down.
But if you want to bet on a crash, this is probably the thing to note: Your bet risk/reward bet is probably 2 year puts far out of the money at the nicest return you can find on pure trash guaranteed to bankrupt in a recession. There are plenty to choose from.

Aside from your favorite company, what pure trash is liquid enough to trade 2-year OOTM puts with reasonable spreads?

MongoDB is right on that edge. I'd guess a ton of the ultra growth sector that just hit the wall is riding that knifes edge

Heaps of companies have perfectly liquid far OOTM options. I haven't gone looking at all because I'll make my money in a recession trading SPY options down, but for example:

TLRY is fairly valued at maybe $500m which would give it a price to sales of 5 and a price to gross profit of 30. (it's very unprofitable so no P/E). It's currently valued at 10x that. Jan 2021 $25 puts can be had for $5.35. The value above would pay a 4 bagger.

AMZN $1800 Jun 2021 puts cost $214 right now. These are an excellent buy (over 100% +EV) regardless of the market by the way. $1500 puts cost only $108. You'll 4 bag at least the former in a recession and 5-8 bag the latter without even breaking a sweat.

Heaps and heaps of choices to bet on a recession in 2 year puts, some of which will even pay off nicely in the next mini correction (Amazon dived to $1350 in December's correction for example).

TLRY I'll grant you, though there are certainly situations where it would outperform during a recession (alcohol and cigarette stocks generally do)

AMZN is hardly profitless trash. Those puts are absolutely not +100% EV.

Is there a good, public data source for things like debt of a business, debt to gross revenue ratios, etc? Are there some standard metrics people generally like to use when evaluating a business?

Everyone wants to make money during recessions, but from what I can see and evaluating some of the popular strategies, it is more about losing less than actually making money.

You can leverage yourself with (expensive) puts, but you have to ask yourself who is taking the other side of this and why it is so. Investors are not stupid and a recession forthcoming in 1-3 years is not some great strategic insight. It is common and popular sentiment. So... put prices are what they are, accounting for that sentiment. I seriously doubt there are risk-adjusted "5-8 baggers without breaking a sweat" just waiting for you to buy.

seems to expensive. why not aim for 1 year puts right after some company has a maturity cliff?

You can find better spots for sure, but this is for a blind recession bet/hedge.

Of course there aren't risk-adjusted 5-8 baggers, there are risk adjusted 1-2 baggers though (pays 5-8 in a recession, pays 2-3 in a correction like last year, pays nothing if the market experiences not even a correct). AMZN puts are one example of this kind of bet.

Can't we thank Jack Bogle, et al for retirement ETFs, target date funds, etc?

Just like some people don't really understand their purchase of a home is really just an effective investment, at cheap rates if you leverage, for your cash to track or slightly outperform inflation, people who work 9-5s and other careers for several decades have no clue what their money is invested in, nor if it's optimal, nor care, really. The financial advisors and employment incentive herd that capital to blind and consistent investment into the markets (not bad advice in general, but clearly suboptimal even if it is mindless, simple, and an effective way to accumulate and/or preserve wealth)...

So basically, in a recession, the middle class on up stay working and assuming they don't meddle, stay buying and holding until retirement. Those people are taking the other side of your trade

Yeah the whole notion that things are correctly priced is hilarious. People have made hundreds of millions over decades betting sports books, which are also "correctly priced" by the market.

The market makers are just bookies profiting off the spread, so you can't make a counterparty argument there. On the other side of your trade are people who don't care about the short term, vast pension funds being an example, and a whole lot of idiots. Remember when everyone was buying subprime mortgages in the trillions despite these being completely worthless? Those stupid cucks are your counterparty. There aren't some super mega geniuses here. Stuff gets mispriced due to the way money flows. Including options. Then it corrects. I mean, last year alone we had vol get blown up in January such that funds got destroyed, then at the end of last year any decent trader could have 25+ bagged every month for three months in a row (October-December) due to hilarious option mispricing as vast money flows went from stocks to bonds.

This efficient market theory is cute, but it's straight out of cuckville. The market is horribly inefficient at times. I agree that it's probably efficient in terms of broad, dumb views such as "momentum stock X is overvalued" or "we can't keep going up forever"...but more nuanced views bet with options can be very +EV.

you and that word

Unless you're a permabear or just a naturally pessimistic person, it wasn't as obvious as you think.

That's funny, because you made one trade during this period, and it was like a $40 loser. Talk talk talk...

And "vast money flows from stocks to bonds" doesn't imply anything about mispricing.

Of course it was obvious. All you had to do was actually understand what you were buying - it was inevitable that interest-repayment-only loans to people with the worst credit put into tranches with other people with the same horrible "subprime" credit who couldn't afford it would go belly up.

It's not like some great predictive ability was needed. Anyone with moderate intelligence who actually read what they were buying knew it was inevitable subprimes would crash.

Read this and educate yourself rather than holding forth on stuff you don't understand.
I'm sorry you missed out on a lot of easy money. Sucks being you I guess.

TLDR. I work in FI, I don't need read some random med student's biography to know what was happening back then. Did some people make money shorting the market at that time? Sure. But there's always random cucks shorting the market and permabears talking about how bad things "really" are.

I'll give you credit that you're not a permabear, so if you any posts dating back then, I'll be happy to read them.

My point is that it wasn't obvious that these were bad securities until 2007 when **** hit the fan. For example today, no one seriously considers auto loans to be a bad product, but the lending standards in autos is probably worse. When you have booming house prices, default risk is mitigated. People have the option to refi if they need to. In addition, if you own a senior bond, 80% of the losses are first going to other investors before they ever touch you. If anything, prepayment is larger risk than defaults. And if you owned FN/FH MBS, you are guaranteed against losses, and FN/FH are implicitly guaranteed by US government.

How can anyone else make money when you're already there soaking in all 25 and 50 baggers?

How many have tried to make the case that markets are perfectly efficient?

The case always being made is that it's efficient enough that it's better to discourage people from trying, and the evidence is in how the large majority of managed funds don't even outperform indexes after fees. You could argue that these managed funds aren't actually hiring the truly elite traders since if they were they'd just go out on their own, but you'd have to expect that the level of competency is still quite high.


Make us beleivers tooth.
No shame in failing the first time.... why not redo the bet?