Signal du Jour - short vol in UVIX

Your quarterly reminder

Since the last time we wrote about a VIX ETN trade, the market landscape has changed dramatically, with most of the headlines revolving around a single word: Trump.

In just a few weeks, the geopolitical order looks nothing like it did three months ago. The USA and Russia sitting at the same table (in Saudi Arabia, no less), followed by a social media tirade labeling Zelenskyy a dictator and pushing him to take a deal or "lose his country"? Not exactly something we had penciled in on our 2025 bingo card.

Yet, despite this, the market has settled into a noticeably quieter phase over the past two weeks, following an exceptionally turbulent start to the year. The VIX sits comfortably near the bottom of its range, while VVIX—typically a measure of tail risk—remains lazily parked just below 100. That’s remarkable, and it’s exactly what we’ll dive into in today’s Signal du Jour.

Let’s get to it.

The context

When Trump was elected in early November 2024, volatility in US equities vanished almost overnight. One thing we didn’t pay enough attention to at the time, though, was that while VIX was flirting with its lows for the year, VVIX remained stubbornly elevated. The market—still rattled by the chaos of last summer and not particularly thrilled about the uncertainty ahead—seemed to settle on a default stance: stay hedged against unexpected shocks.

And, as the chart below suggests, that strategy looked pretty smart—at least on paper.

Looking at this, holding options—whether puts or calls—on an index that saw some serious whipsaws in December and early January seems entirely justified. The market had reason to keep demand for VIX options alive. The question now is: does it still?

In comparison, the SP500 may have had some wild swings too, but it hasn’t experienced a severe drawdown—at least on a close-to-close basis—in quite some time. How long exactly? Well, that depends on how you define it. We’ll use a simple yet psychologically significant measure: a clean, ugly -5% day. That hasn’t happened in over two years. So why would you buy SPX options then?

Yet, looking at our first chart of the day, it’s easy to see that realized volatility in VIX-related products was running high, as the market wavered between holding onto insurance or selling it.

Realized volatility at 30 days is finally going down in VXX.

And while it was clearly climbing after the FOMC meeting and as geopolitical tectonic plates shifted rapidly in January, things have since settled down. So much so that our models suggest this relative calm could persist—until, well… the next Trump move?

We expect the realized volatility to keep going down over the next 30 days.

But at this point, a paradox should start forming in your mind—why is VVIX still so elevated while realized volatility in VXX (yes, we know it’s not the VIX) is steadily declining? Isn’t this exactly what everyone talks about when they mention the variance risk premium—where the market is willing to pay a hefty price for something that ultimately fails to materialize?

Let’s take a closer look.