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How Bill Ackman Is Taking Shelter from a Potential Market Drop

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Bill Ackman’s recent activity

Bill Ackman, an activist investor and the CEO of Pershing Square Capital Management, shared his views on how geopolitical risk could affect market movement (SPY) in a CNBC report.

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Bill Ackman on geopolitical risk and potential market drop

Bill Ackman is concerned about the increasing geopolitical risk. North Korea has affected market performance with the launch of various nuclear missiles. The United States has imposed some sanctions on North KoreaPresident Donald Trump warned North Korea on August 8, 2017. In response, North Korea said it would launch an “enveloping strike” in the US territory of Guam. Tensions between North Korea and the US (QQQ) (IWM) have fallen gradually since then.

These rising geopolitical tensions are increasing market risk. Bill Ackman is taking shelter from a potential market (VOO) (IVV) drop in the form of buying out of the money call options in the Volatility Index. He said this strategy “will protect against stock market risk.”

The Volatility Index generally has an inverse relationship with the stock market. In the past, the Volatility Index has moved up when the market has fallen. If the stock market falls, then we might see some upward pressure on the Volatility Index. The out of the money call options in the Volatility Index could provide a strong return if the instrument’s spot price moves near its strike price or higher than its strike price. Recently, we saw that Jeffrey Gundlach has also taken a long position in the Volatility Index.

In the next part of this series, we’ll analyze Bill Ackman’s view on Hilton Worldwide Holdings (HLT).

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