Signal du jour - short vol in JPM

Happy summer holidays.

We wrote on Sunday that with VIX6M at 22, there was little reason to be overly anxious about the next six months — and that a bit of calm was warranted. You are in luck: the latest unemployment report delivered the same message, but in macro form.

With 147,000 jobs created and unemployment falling to 4.1%, any lingering doubts about the resilience of the US economy just left the building. We suspect traders will not wait for the closing bell to start their Fourth of July long weekend — or, for some, their summer break. In full transparency: we are among them. Sharpe Two will pause for two weeks, with articles resuming on July 20.

So just a quick note today. It is canicule season in France, the markets are dull (SP500 daily realized volatility was 5.42% yesterday), and who really wants to read about the banks right now?

But if you do insist — today we look at short volatility in JPM. Let’s get to it.

The context

The Q2 earnings season kicks off in exactly one week, starting, as usual, with the banks. We are not earnings specialists and have no particular view on what to expect, though we will keep an eye on anything linked to extra gains from the wild trading period in April — typically a positive for investment banks.

That said, most of Q2 was remarkably quiet, and the same applies to the banking sector.

Things have cooled, and while Trump is now negotiating — slowly but steadily — tariffs with various trading partners, the banking sector appears far from concerned about what might eventually emerge from these talks.

There has, of course, been recurring chatter about the astronomical US debt levels and the weak performance of the USD. But for now, none of this is alarming investors. From a realized volatility forecast perspective, we do not expect much to change in the weeks ahead.

We do not expect things to meaningfully change in JPM over the next two weeks.

More specifically, JPM is trading well below the 20% mark. Even if something were to stir up the market, it is difficult to imagine realized volatility pushing above 25% over the next two weeks.

Once again, we have no edge on what earnings will deliver next week. What we do know is that this sets the stage to take advantage of distortions in the volatility surface, as traders are likely overpaying for insurance.

Let’s take a closer look.