“It has been well and correctly remarked that the only things that go up in credit crisis and financial panic are correlations and volatility.” - Bill Miller
As we approach the end of 2024, the CBOE Volatility Index (VIX), often referred to as Wall Street's "fear gauge," is painting a picture of calm. Recently, the VIX fell below 14, a level that suggests a market relatively free of anxiety as we head into the holiday season. But what does this mean for investors, and should we brace for a shift in sentiment as we move into 2025?
The volatility index can be intimidating. However, it's important to remember that since implied volatility moves faster than price, the VIX can present compelling opportunities in markets, both on the upside and the downside. We aim to empower investors to use this crucial hedging and speculation tool to their advantage, even without the extensive background knowledge of a Quant that many feel is necessary for trading the VIX. The VIX is simpler than you think, and there are many repeatable patterns that enterprising traders can exploit.
Understanding the Current VIX Landscape
The VIX measures the market's expectation of volatility in the S&P 500 over the next 30 days. A lower VIX indicates a market expecting less turbulence, while a higher VIX suggests anticipation of more significant swings. As of late November 2024, the VIX's descent to 13.90 reflects a market that is surprisingly placid despite the backdrop of geopolitical tensions and economic uncertainties.
This calmness in the VIX can be attributed to several factors. Firstly, the market has been buoyed by optimism around the potential for regulatory rollbacks and tax relief under the incoming Trump administration, as highlighted in recent articles from Punk Rock Traders. The anticipation of a more business-friendly environment has investors feeling bullish, even in the face of potential policy unpredictability.
Historical Context and Recent Performance
Historically, the VIX tends to rise during periods of economic uncertainty or geopolitical tension. However, recent data shows a different trend. For instance, during the election period, the VIX experienced a significant spike, reaching an 18-month high, only to be followed by a rapid decline post-election. This pattern was expertly navigated by Punk Rock Traders, who capitalized on both the spike and subsequent volatility crush, achieving impressive returns of +313.00% on a VIX put option trade initiated on November 5, 2024.
This strategic play aligns with the sentiment expressed in a previous article from October 2024, which anticipated a post-election volatility crush. The article underscored the importance of relying on historical data to predict market movements, a strategy that proved successful once again.
The Road Ahead: Will the Calm Persist?
As we look towards 2025, the question remains: will the VIX continue to signal calm, or is this the calm before the storm? Several factors could influence the VIX's trajectory:
1. Geopolitical Risks: Despite the current calm, geopolitical tensions, such as those between the US and Russia, continue to simmer. Past articles have noted that while markets often underreact to geopolitical risks, any escalation could quickly change the VIX's course.
2. Economic Policies: The Trump administration's policies, particularly regarding tariffs and trade, could introduce new volatility. The market's current optimism hinges on the assumption that pro-business policies will outweigh any negative impacts from trade tensions.
3. Market Sentiment: As we approach the end of the year, the traditional "Santa Claus rally" could further suppress the VIX. However, the potential for unexpected economic data or policy announcements means investors should remain vigilant.
Actionable Insights for Investors
For investors, the current low VIX presents both opportunities and risks. On one hand, the calm suggests a favorable environment for equities, supported by strong economic fundamentals and positive earnings growth projections for 2025. On the other hand, the potential for sudden spikes in volatility means that hedging strategies, such as maintaining a balanced portfolio or considering protective options, could be prudent. We combine both long and short VIX positions to give our subscribers opportunities regardless of which way the VIX goes.
Although the market's current tranquility is appealing, the underlying uncertainties suggest that a cautious approach, balancing optimism with preparedness for volatility, is wise.
While the VIX's current calm suggests a stable market heading into the holidays, investors should remain alert to the potential for change. By staying informed and strategically hedging against volatility, investors can navigate the complexities of the market with confidence.
