Signal du Jour - Short vol in China

The VRP is there, for a reason though.

After the tariff shenanigans over the weekend, the early part of the week played out much like the Deep Seek saga: a sharp sell-off at the open, only for the market to treat it as a prime dip-buying opportunity.

As a result, VIX is back on the 15 handle, and the market is now just one percent away from all-time highs. How long will this drop-and-bounce routine last? No clue. But one thing is clear—this is still a tricky market to short volatility. Implied volatility remains too low to justify being aggressively short in US equities, forcing us to look elsewhere.

And what better place than China, the other major protagonist in these past two weeks? Yes, we took a hit last week selling vol in Chinese ETFs, particularly ASHR. But over the past two months, it's been a stable and profitable trade—enough for us to present it in today’s edition of Signal du Jour.

Let’s dig in.

The context

If Donald Trump is shaping up to be the main character of 2025, Xi Jinping plays the quieter but equally pivotal protagonist—one whose moves could significantly shape how this geopolitical saga unfolds.

While Trump extended an olive branch (or at least a temporary reprieve) to Canada and Mexico, delaying the 25% tariffs set for February 1st, China took a different route—more eye for an eye. In response, Beijing launched an investigation into Google and slapped fresh tariffs on a range of American goods, from agricultural products to heavy machinery and tech equipment.

While FXI and KWEB have climbed 6% and 8% YTD, largely carried by the big tech names, ASHR has been stuck in neutral, trading flat for most of the past three months.

After the initial optimism surrounding economic stimulus faded, investors lost interest in Chinese assets, and realized volatility collapsed from its October highs.

The realized volatility in FXI and KWEB is on the front foot after the Deep Seek saga and the first salvo of tariffs war.

And while volatility has started creeping back up in FXI and KWEB—thanks, once again, to the latest developments in the tech space—ASHR remains largely ignored by investors.

At present, we forecast realized volatility to tick up slightly from its 30-day average, settling somewhere in the 17.5 to 19.5 range—assuming no major geopolitical developments in the coming days.

We currently forecast that realized volatility will be slightly higher than what we observed over the last 30 days.

With that in mind, let’s turn to the options market to gauge how much uncertainty premium is currently priced into different contracts and determine how we could structure a trade in ASHR.