The volatility surge in early August provided a textbook opportunity to trade the VIX (derivatives). The VIX soared from 15 to a peak of 65.73 in just nine trading days. During this period, we shorted the S&P 500 Put options, easily doubling our profits on two consecutive trades. After the VIX peaked, shorting volatility (using options on VIX derivatives) also yielded decent profits, with two weeks of trading resulting in a total return of over 100%.
The only downside was that after the VIX peaked, the volatility collapse happened too quickly, with the VIX returning to the 15-16 level in just eight trading days. If the VIX decline had been more stable and prolonged, the Put Spread strategy (high VIX is not suitable for buying single-leg Puts) could have captured more profit.
Now that it’s been more than a week since the risks have subsided, the market may be approaching another inflection point. Several factors are ‘coincidentally’ aligning at a delicate timing. The S&P 500 is nearing its all-time high, and the VIX has returned to a level where it needs to choose a direction. From a fundamental perspective, the market has fully priced in the expectation that the Federal Reserve will cut rates in September and by 100 basis points in total this year. Next week, the U.S. will release the latest non-farm payroll data, and the significant downward revision of employment data on August 20 had no impact on the market. Additionally, U.S. equities seem indifferent to geopolitical risks in the Middle East, Russia-Ukraine, and the South China Sea. This means that almost all the positive factors have been priced in, but the risks have not been sufficiently discounted. Moreover, September is a seasonally volatile period for U.S. stocks, and this year, there is also the U.S. presidential election in early November…
Wednesday night’s Nvidia earnings report might bring another pleasant surprise, but honestly, we don’t have the ability to predict the market. Therefore, an ideal strategy at this time is to use options to go both long and short on the S&P 500 (equivalent to going long on the VIX). The advantage is that implied volatility is currently low, so buying options is not too expensive. We have already established a straddle position, and we will update on the progress of this trade. Good luck trading!