Look, I was on Schwab's Big 3 Show today with Rick running the charts.
Three ideas. Three trades I'm putting on right now.
And yeah, I'm not giving you the exact strikes and spreads here. You want the full trade structures?
But I do want to walk you through the thinking because honestly, these three setups — they're kind of stacking up in a way that has my attention.
THE VIX PLAY
So right now, AI is all the rage. The bubble conversation is all the rage.
And you wouldn't know it, but we're in October. Government shutdown. I mean I could just stack some of the risks in front of us and you wouldn't believe it.
But the VIX? Just shrugs. Yeah, who cares. Let's just keep moving on.
Except I think it's high time to actually take a bullish position in the VIX.
You know, if you have that portfolio and you just want to reduce risk a little bit. Or you're kind of looking at this thinking the same thing I am — there's a whole lot of risks out there.
The possibility of volatility spiking in the next 40 days? You can almost taste it.
So I'm looking at volatility as either a hedge for long portfolios or just taking a shot looking for volatility to effectively rise.
TOLL BROTHERS (AND THE HOMEBUILDERS)
The first thing I'll start with — look, there's still a housing shortage.
A lot of people that are bullish inside of the homebuilders are going to point that out.
But a lot of these home prices are still relatively out of reach. And the one thing the homebuilders are doing right now to increase the appetite of home buyers is they're undergoing huge margin compression.
They're doing that by buying down rates.
You look at a 30-year mortgage that might be between 7 and 8% depending on the credit rating of the buyer — the homebuilder may actually buy that rate down to five and a half, 6%. And they're actually eating that.
Then you obviously have inflationary pressures in there.
This margin compression just continues for the homebuilders.
They're just trying to move units at this point. Making significantly less money.
Hence we have our downgrade. The entire XHB took a good-size hit in the last couple of days.
So in the near term, with the economy possibly slipping here, uncertain — I just don't think it's a great outlook.
And this isn't just about Toll Brothers backing off here in the near term or short-term pullback.
This is about big, ugly, nasty pullback inside of this marketplace. I think it's ripe for that with this margin compression going on.
TLT
I'm also going to take the bearish side on this one. As you probably know, I do like my bearish trades.
But I have some strong feelings regarding the bond markets right now.
Fiscal irresponsibility. Government shutdown. Again, a lot of risk.
Look, this is all about the possibility of bond vigilantes returning.
The spending cuts have never materialized. We continue on a path. But the thing I think I want to point out the most — look at gold.
Gold is just erupting to the upside.
My trade at this point is taking the short side of bonds. Looking for bonds to actually head lower, rates to head higher.
Look, I know everybody wants those interest rates lower.
But on the longer end of the curve, at least for now, that's just not going to materialize easily with some of the deficits that are out there. The debt just continues to explode.
Eventually these bond vigilantes are going to materialize again.
SO HERE'S THE DEAL
VIX looking for volatility spike with risks stacking up.
Toll Brothers and the homebuilders with margin compression that just can't continue.
TLT and the long bond with fiscal reality that's eventually going to catch up.
Those are the three ideas I walked through on Schwab today. Rick ran the charts, I laid out the exact trades — the strikes, the spreads, the expirations, the risk-reward on all three.
You want the specifics on how I'm structuring these?
Watch the full breakdown here.
To your success,
Don Kaufman