Signal Du Jour - short vol in XLE

A little bit of (counter) intuition.

The market continues its pendulum swing—even as implied volatility sits well below where it was just ten days ago. Over the past few sessions, equities rallied hard off chatter that Trump had “no intention” of firing Powell, walking back previous weekend noise and social media storms. Add to that a few conciliatory remarks about the US–China trade war being “unsustainable,” and suddenly we’re up nearly 7% off Monday’s lows.

This morning? The hangover is real, especially considering we’ve already shed 2% since yesterday’s highs.

Yes, trading lately feels like navigating high seas. And if you’re prone to motion sickness, now might be a good time to step away from the screens.

That said, the game goes on. And with vol back to more manageable levels, most retail traders can finally breathe—and trade—hopefully without a Dramamine prescription.

Today, we’re looking at a setup in XLE—the ETF tracking energy companies. And given how erratic crude has been since the start of the month, it’s worth asking whether traders aren’t overstating the next move.

The context

We’re smack in the middle of a chapter your kids might be studying in a geopolitical textbook fifteen years from now. And while it took serious squinting to find any sector spared during April’s carnage, energy certainly wasn’t it. XLE took its fair share of bruises—roughly in line with the S&P 500, and notably worse than more traditional defensives like XLU.

As expected, realized volatility spiked alongside the chaos. And while things have calmed since, we’re still a long way from anything resembling tranquil waters.

At 46.03% annualized realized over the past 30 days, we’re—unsurprisingly—deep in uncharted territory. Vol has eased a bit from peak panic, but don’t get too comfy: the front of the curve remains sharply backwardated.

The front part of the slope in the realized volatility term structure is still severly backwarded.

That’s bad news for anyone trying to harvest premium on the short end. Price swings have routinely blown past what was implied, leaving short-dated sellers exposed. But more on that in a minute.

Is there a silver lining? Maybe. Extremes like these often self-correct. But don’t try to get clever with timing—realized vol isn’t vanishing anytime soon. Adjust your sails accordingly.

Realized volatility is here to stay, we still expect somewhere between 30 and 35% over the next month.

We expect it to ease toward 35%—but don’t count on a return to pre-spike levels anytime soon either.

Feeling a bit angsty? Good. That’s (almost) by design. Trading is often a game of self-inflicted chess: sometimes, to find a setup, you have to look through the lens of those with the most at stake. So let’s do just that—see what kind of premium is currently baked into the options market, and whether it gives us anything actionable.