How Hedge Funds are Driving this Market Sell-off

Market Sell Off

After last week’s market sell-off that ended with the S&P losing 12%, last Friday I shared a couple adult beverages with friends to unwind. One of these friends is a doctor, and his wife works for the FDA as a pharmacist. Not surprisingly, the coronavirus was the topic of the night. And while I won’t share their professional opinions on the virus, one interesting discussion we had was “if you were booked for a cruise next week, and your money was non-refundable, would you and your kids go?” They somewhat hesitantly said they would.

The next night I had more drinks with another group of friends (don’t judge me, it was a doozy of a week!) and the same discussion took place. This family had just gotten back from a Disney cruise in January, had a wonderful time, and the plan was to book the exact same cruise next year. Those plans are now on hold.

(How about you? Would you take your family in a cruise next week? Leave a comment below.)

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2 Low-Risk Options Trades

Clearly the coronavirus has impacted cruise line and airline stocks as Royal Caribbean Cruise (RCL) is down 31% in the last month, and Delta Airlines (DAL) lost 20% just last week.

While these stocks are clearly under pressure, I do wonder if the worst has been priced in. And if that is the case, and I wanted to take a longer-term perspective, buying call options is a low-risk way to get bullish exposure to these stocks. For example, here are two trades I was looking at:

1. Buy the Royal Caribbean Cruise (RCL) January 80 Calls (exp. 1/15/2021) for $15.

If RCL were to close below 80 on January 15, 2021 the most I could lose on this trade is $1,500 per call purchased.

However, if RCL were to rise I would have bullish exposure to the stock for nearly 11 months.

2. Buy the Delta Airlines (DAL) January 50 Calls (exp. 1/15/2021) for $6.

If DAL were to close below 50 on January 15, 2021 the most I could lose on this trade is $600 per call purchased.

However, if DAL were to rise I would have bullish exposure to the stock for nearly 11 months.

How Hedge Funds are Driving this Market Sell-off

Moving on to the power and speed of the market decline last week, I wanted to share with you some of what I wrote to my Cabot Options Trader subscribers last Thursday:

“Yes, the market is likely falling on the global supply chain grinding to a halt, which could kickstart a recession. That is likely the original reason for this sell-off.

 “However, what I think is exacerbating this move is the speed in which popular hedge fund trades are unwinding.

 “For example, hedge funds shorting the VIX is a VERY popular strategy. When the VIX goes from 15 to 20 in a short amount of time this causes some issues, but it’s hardly the end of the world. 

 “However, when the VIX goes from 20 to 30 in the blink of an eye, many of the algorithms associated with these funds’ VIX  strategy start selling S&P 500 futures. And when the jump is from 30 to 40, the selling of futures really picks up steam. It becomes a self-fulfilling prophecy of sorts.

 “Similarly, headed into this year the assumption was that the Federal Reserve was going to be on the sidelines. However, with the market crash and the economic effects of the virus, the bond market is now pricing in three to four interest rate cuts. Again, this likely caught many hedge funds and institutions off balance, which could have forced them to unload S&P 500 futures—thus, exacerbating the decline in the stock market.

 “So where do we go from here? As usual I am not going to make any predictions as no one knows when the next negative/positive headline will move the market 2% in the blink of an eye.

 “However, I will say there is no doubt that the coronavirus is now the lead story on virtually every website, and my friends and family members are definitely reaching out to me [regularly] for perspective on the market move. When the mainstream gets excited about a market related story oftentimes we are getting in range of the end of the sell-off …  though, of course, we won’t trade on this secondary signal.”

Will the mainstream media and my friends and family actively talking about the coronavirus signal the bottom for the market? Only time will tell. For the sake of my 401(k) and my liver, I certainly hope that’s the case.

Jacob Mintz

Quick Profits, Controlled Risk

Jacob Mintz is a professional options trader and Chief Analyst of Cabot Options Trader. He uses calls, puts and covered calls to guide investors to quick profits while always controlling risk. Beginners and experts alike can gain from following Jacob’s advice.

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  • Victor H.

    I consider myself a risk taker as I participate in the options market and I keep an 80-20 retirement investment portfolio at age 78. I was scheduled to be on a cruise next week and I was expecting to go given the low risk of contracting a disease. But when the cruise line called and offered to exchange this trip for one later in the year or next year, I accepted that deal.

  • John M.

    As long as it wasn’t a trip to China I would definitely not change my plans. So for me it’s a YES

  • Jay B.

    would i let a cold virus strain stop travel plans? god no. I would and will enjoy less crowded travel.

  • Helen M.

    Given that I hate cruises, I would have to leave that fact aside. I would not go on a cruise. A place that is close quarters, people from all over the world, a virus that doesn’t show up right away and conflicting protocols make my response a no.

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