Vol speed round

Friends,

I’ve been trading more than usual this week. I sent a couple impromptu emails describing my thinking.

Sunday: a quick thought before the week

Monday: moontower raw: things i did today and why

Tuesday: moontower raw: another day of trading

I updated you on all my thoughts but the main thesis that drove my positioning:

There was pressure building for either other countries or Trump to step up. The longer the impasse lingers the more damage it does to the global economy and even if you don’t think the economic damage is mutually assured destruction, a chunk of the population who helped give Trump a plurality was, well, nervous is probably an understatement. It’s hard to get Elon to shut up and he was relatively crickets if he wasn’t posting Thomas Sowell free trade memes.

Regardless, it was likely that a headline would come pretty soon.

Then the erroneous Walter Bloomberg tweet that spiked the SPX 7% gave a tell on what a major trade deal announcement could mean for the straddle.

Translating this into option surface language:

There’s going to be a big up move soon. But if not, the market leaks lower. Spot VIX remains north of 40 even though we didn’t move Monday. Or Tuesday on a close-to-close basis.

In short…this market looks like an earnings stock in which there a large lump of variance that needs to be priced. We just don’t know the earnings date.

My positioning of choice:

• Buy buy OTM calls and call spreads instead of buying the dip. Don’t hedge the delta.

• Buy May VIX futures

What’s the thinking?

• If the announcement doesn’t come the market goes lower. All I’ve done is incinerated call premium. But the VIX futures “decay” higher towards spot. They roll up. My shadow decay in the VIX futures helps defrays my call option decay.

• The ratios are tricky (more on this below).

  • I’m looking at where stocks have come from to anticipate what price level they could rip to (and their betas to SPY on the move).

  • I need to guess the up and downside of the May VIX futures. This helps me estimate their beta to SPY. If SPY is up 10% how much are the futures down…I figured probably not worse than 25% given how flat the VIX futures curves was for 2025 once you got past the front 2 months. In other words, regardless of what happens, the market thinks vol is here to stay. 3-9 month term structures are surprisingly firm at these elevated levels. (I also looked up rolling 1 month vol for SPX and noticed that it barely dropped below 20% in 2022…Given how discounted they looked to spot VIX and the volatile context of 2025 already…i thought 5 clicks was a reasonable downside for those futures, but they could probably go up 10 points if the market dropped another 15% (a down beta also of about 2.5).

I’ll prattle off some trading thoughts and lessons from the experience behind the paywall but just 2 things before that.

1) Remember, SPOT VIX IS NOT TRADEABLE!

When vol spikes, people go “number is up I should sell, it always goes back down”.

That’s not expectancy thinking. The VIX futures were at a significant discount to spot VIX. Spot VIX can fall, but it doesn’t mean your short futures will profit. The discount could simply narrow. Vol will likely go down, but that’s baked into the fact that you would need to sell VIX futures 20 points below spot. It’s like buying puts in super hard-to-borrow name…the point spread already implies the stock much lower. You sold me May futures and I just explained my reasoning above for why they seemed cheap. If you’re adamant to buy a dip just buy stocks. Your trade expression is strongly correlated to doing that anyway. Why the brain damage and the vig without understanding the the true nature of the trade?

See Benn’s tweet for more

2) The app is shining in this environment. Without this lens, I wouldn’t be able to “see” what sticks out without our opinionated metrics.