The VIXgilantes Strike Back
Sizing Up the Chaos of Early April
Loyal Listeners, it’s spring time! I’m back from Sunny and 93 degree Las Vegas where I visited the Sphere for the third time, this time to see the Eagles. What an outstanding venue this is. These senior statesmen of rock n’ roll – including Joe Walsh, Don Henley and the son of Glenn Fry, Deacon – opened with Hotel California and played all the old hits. And, in fitting tribute to today’s market risk environment, “life in the fast lane” was one of them. To be sure, markets have been fast. How fast, you ask?
in 6 short trading days from 4/2 to 4/9, the SPX has realized as much vol as it did during the ENTIRE year of 2024. Put differently, if the market were to close for 246 consecutive days (i.e., 252 trading days in a year), realized vol, with just those 6 days of returns, would be the same 12.7% as it was for all of 2024. This underscores two of the most critical properties of volatility and the first one is that it clusters. Bursts of volatility are a cornerstone of the behavior of the SPX. Something happens – in this case “Liberation Day” (giant air quotes included here) – the market processes the new state of the world – and reacts accordingly.
And the second property – is that with respect to vol – big moves matter most. The long vol trader is an interesting character. He or she needs to be patient as most trading days likely produce losses. Manageable losses, but losing days nonetheless as the option theta exceeds the gains to be extracted from rebalancing a delta hedge. Losing most days isn’t fun. But…but…but…when disruption hits, a trader can make up for those small losses, quickly, sometimes realizing substantial profits by trading the explosive volatility.
Chris Cole of Artemis once said that volatility was an instrument of truth. The disruption that saw 10-day realized on the SPX reach an outrageous 65%, is the market’s chaotic search for a new equilibrium set of prices. It’s the squaring of positioning set against a new handicapping of uncertainty. To be sure, it wasn’t pretty. But, there are lessons to be had in contemplating the recent price action over the last few weeks with – hopefully – some insights that you find valuable.
What follows is my take on the recent chaos in markets and where we go from here. To set the table, and running with the previous observation on the burst of volatility just experienced, if we look at 10 day periods and sum the squared daily returns, the Liberation Day fallout ranks only behind Covid and the GFC in terms of severity using data going back to 1990. I exclude the 1987 crash because, well ya know, squaring a 20% daily return is going to make for an impossible comp. But the 10 trading days ending with 4/16/25 ranks ahead of the 2011 debt ceiling crisis, ahead of the 1998 LTCM episode, and ahead of the 2002 accounting fraud crisis in terms of severity. Each of those 3 episodes saw a VIX in the mid 40’s. Our recent peak in the VIX is 52 with intraday peaks closer to 60.
Late in Season 4 of Succession, in the struggle to buy the Roy Family’s prized assets, tech entrepreneur Lucas Madsen said, “things are gonna get nasty”. He could have said so about markets as well. As the dollar fell, as the basis trade wobbled, as correlations and gold surged, it was clear to most – but perhaps not to Trump – that the financial economy can’t run on a 50 VIX. American runs on Dunkin’, but the market don’t run on a 50 VIX.
Sure, Scott Bessent put on a brave face in the days after April 2nd, telling us it was a Mag 7 not a Maga problem. Remember that? Was I the only one curious as to whether he’d come up with that himself? And here I thought Bill Mahar had good writers. Bessent’s seen a financial crisis or two over his career and he had to have had some lingering doubts about the sustainability of policy. That was on Friday April 4th. It would only get worse a few days later after the market had the weekend to noodle on things.
By April 8th, the VIXgilantes (see what I did there?) had taken matters into their own hands and we must recognize their role in motivating the giant climb down by Trump and Co. on April 9th. Throw in a vulnerable setup in swap spreads which reached maximum inversion at the same time the VIX peaked, and you are cooking with gas when it comes to fast perpetuating a market risk event. Perhaps Bessent was at the Sphere with me in Vegas, and the Eagles hit “Take it to the Limit” was on his mind.
The precedent for 50 VIX (subset of two: GFC and Covid) is unappealing: it's 50 on the way to 80. Bessent didn't take my call – or even read my tweet - but hopefully he understood the vulnerability. He should have known better well before April 9th and his comments were tone deaf at a minimum. We know from history that SPX vol is an interesting sale at 20, a really interesting one at 30, a compelling one at 40 and at 50 it's an exposure to cover as quickly as you can. We also know that a leveraged trade like swap spreads reaches its maximum level of attractiveness at the very time when a counterparty is about to need fresh capital, just ask John Meriwheter.
Such is the nature of assets or spreads that have high negative skewness. With respect to implied volatility on the S&P 500 Index, the forces that lifted the VIX to 50 are exactly those that can propel it much higher, especially when the sellers turn buyers for risk management purposes (first rule: don't die).
Each risk episode is the same, but also different. I always loved what podcast guest and former FOMC governor Kevin Warsh said about material disruption events: “if you’ve seen one financial crisis, you’ve seen one financial crisis”. Love that. My policymaking takeaway is that if you are in the business of financial firefighting, you’ve got to both identify the source of the flames and have the proper tools to douse them. Each of these flare-ups has unique properties.
What can we learn from April 2nd to April 9th, 2025? Plenty. We can observe highly unsettling price action that bears at least some similarity to that experienced during the Covid market shock. I refer to the "liquidation" phase of the risk-off from March of 2020 as the roughly one week period when the stock and bond market crashed together, the dollar surged and assets priced in dollars like gold and crude plummeted. Then, the "system's" demand for cash-like liquidity was so great that even assets like long-dated Treasury securities were no longer considered "safe" securities. Only cash was.
This time around, the sell-off in longer dated Treasuries amidst a sky-high VIX and substantial equity market drawdown was what must have finally gotten Bessent’s attention. Even Trump suggested the bond market got “yippy”. Perhaps the VIXgilantes shouted “yipee ki-yay” on April 9th, forcing Trump’s hand.
As I tweeted on April 8th, reaching 50 on the VIX has meant reaching 80 twice (GFC and Covid). I didn’t expect that to occur again because the truly destabilizing conditions of the GFC and Covid were not in place. What was also strikingly different between 2025 and 2020 and 2008 was that this was – again to borrow in ironic fashion from Bessent – an “own goal” risk event. That is, a preposterous by most counts, self inflicted wound that was always only a tweet away from de-escalation. And that’s, of course, exactly what happened on April 9th.
What prompted the epic Trump climb-down on Tariffs that his Commerce Secretary Howard Lutnick assured us days earlier would be in place for days and weeks? Not just the VIX and a rarely observed joint rally in the front end / sell-off in the back end of the government bond market. But also, the recognition that vol of this magnitude is punishing and causes all kinds of knock-on effects. Margin requirements are raised, OTC swap lines are re-evaluated, hedges encounter all kinds of basis risk, liquidity plummets.
At a minimum, when vol skyrockets, an investor's value at risk does as well. The market made your size larger and as a result, you must sell to get back to the same VaR. It’s also worth commenting on financial product innovation. Today’s markets bear no resemblance to those in which Graham and Dodd would publish their book “Security Analysis” in 1934. The TQQQ – robotically delivering 3 times the daily return of the QQQ wasn’t around back then. But on the 3 days of April 7th, 8th and 9th, this beast saw combined volume of 1bln shares. Predictably, it rose by just about 36% on April 9th, when the QQQ soared by 12%. Imagine being the portfolio manager for TQQQ coming back from lunch on April 9th and seeing news of the 90-day tariff reprieve. It’s gonna be a busy afternoon. Everything seems to have made it through this vol storm in tact, but we must appreciate the manner in which products can amplify moves.
Scott Bessent would seem like someone with a fair amount of financial plumbing experience and an appreciation for the reflexive nature of markets. Once ignited, a financial fire takes both capital and will to put out. Mike Novogratz said during one Alpha Exchange podcast, "a crisis event will unwind at a pace that it wants to." I always took that to mean you really have to respect the force of an unwind and that policymakers sometimes may struggle to contain the damage.
In "Too Big to Fail", the amazing 2011 docudrama on the GFC, Hank Paulson (played so well by William Hurt) is hit by significant bouts of insomnia. He rightly recognizes that a crash is occurring "on my watch". Along with Tim Geithner (also played so well by Billy Crudup) Paulson is playing risk whack-a-mole. There wasn't a risk-off that Geithner didn't want to throw the kitchen sink at. Scott Bessent told us that leveraged players in the bond market are experiencing an "uncomfortable but normal" deleveraging. He would seem to appreciate the leverage in the financial system and how quickly out of hand these things can get. It took him too long, but Bessent was finally able to channel more of Paulson and Geithner in recognizing that markets simply cannot self-correct when the forces of deleveraging are set in motion. My view is that he was dangerously close to overseeing what easily was on its way to becoming an epic crisis.
One of the risk indicators telling us as much was not just the surging VIX, but the VVIX as well. This is the measure that helps us quantify the cost of VIX options. On April 8th, the VIX May 35-36 strangle was quoted and the prices were an eye-popping 15.25 mid market. Let’s consider for a moment what that price tells us. Your break-evens at expiry are roughly 20 to 51. To get those, I am simply subtracting 15 from 35 and adding 15 to 36. I thing most would agree, that there’s a lot of room to make money on this trade at …at expiration.
But, at a time when the SPX was experiencing outrageous intraday swings and losses were fast accumulating for investors in various types of trades, the expiration break-evens were not at all what this trade is about. Being short a straddle on the VIX it to expiry is exceedingly difficult. It is simply the case that vols this high demand a giant distribution of potential outcomes. As I have said before, vol and "vol of vol" are highly correlated.
As things got more and more disorderly in the days leading into April 9th, for me it became trying to balance the inertia of the VIX and the recognition that unwind events can gather self-reinforcing energy, against the unique nature of this particular episode, which, as noted, was self-inflicted.
The tone deafness of Lutnick and Bessent notwithstanding, one had to believe that government officials were set to blink in some way. The scars from the market chaos of the GFC and Covid will always remain. Talk tough to the market as you might, you simply wind up creating really hard to fix but also urgent problems when markets malfunction.
On April 6th, I wrote on Twitter that I was in the camp that we were setting up for a nicely tradeable reversal of unsustainably high VIX levels. As always, calling a top was impossible and for me, it was not appropriate to outright short VIX futures or call options or SPX vol. Sure, the levels were eye popping. But the policy incoherence was what got them there. How could one underwrite the risk or even more incoherence?
The beauty of the VIX options complex is that it provides the ability to express a premium contained view on vol going lower through various combinations of puts, 1x2 put spreads, etc. When I say premium contained, I mean you can spend a defined amount of dollars to play for a lower VIX and should the system literally blow up, your loss is limited to that upfront premium you expended.
About Fannie and Freddie, Bill Gross famously said in 2008 as the GFC was heating up, "shake hands with the government and buy what they're buying". I always thought his very public campaign was brilliant on this front. In the days before April 9th, I thought there was a chance to shake hands with Bessent and sell what he’d ultimately have to sell- the VIX. It was based on a simple, but convicted view that the Administration would not be able to execute on any policy with the VIX in the 40’s and 50’s for an extended period of time. A 50 VIX is a market moving 3+% every day. That reflects an incredibly unhealthy risk-taking and most likely economic environment.
So the trade I liked best was some version of a VIX May 1x2 put spread. You are expending a little bit of upfront premium and playing mean reversion lower, leaning into the trade by selling twice as many downside puts as you are buying. Now, as you know, “no free lunch” is the cornerstone of my view on markets. They are damn efficient, and as the grifters tell you otherwise, just ignore them. My 1x2 put spread carries two risks. First, if I am spending some upfront premium to implement it, I could lose that if the VIX goes to 100. Second risk is the opposite one. That the VIX collapses, which it kind of has. Because I am short 2 downside puts, at some point, the reversal lower in the VIX starts to hurt me.
Let’s briefly look at two of these trades, both implemented on April 7th. The May 40-30 1x2 could have been put on for 1.2. Your break-evens at expiration – repeat at expiration only – are 21.2 to 38.8. Boy that sounds good, but it’s a long time to wait and a lot can and has changed. The current MTM price is 1.74. A good trade, but we already have May VIX at 23.5. The delta of this trade is actually very positive right now. In other words, if you have this on, you are rooting for the VIX to go up, not down from here. Remember, your best outcome would be for the VIX to finish at exactly 30.
Let’s now look instead at the May 30-25 1x2 put spread. This came at right around even money on April 7th…at 7 cents. It closed at 85 cents on Friday April 25th. This, too has a currently positive delta. Best case is the VIX hangs out in this neighborhood and finishes at 25.
These trades are very difficult to hold to maturity and monetizing them beforehand mostly leaves investors some version of frustrated, angry and railing about how the VIX market making crowd picked their pocket. For those who have this on, it’s not a terrible spot to take some profits. A driving factor behind what motivated this trade idea for me was the sky-high level of the VVIX. In doing the 1x2 you were leaning into the generous option premium the market paid you on April 7th via this inflated implied vol of vol. The VVIX closed below 100 on April 25th. Incredibly – at least to me – is that this is basically the same level as it closed on February 19th, when the SPX was at its all time high.
This level now suggests that the outrageous level of realized vol of vol experienced over the past several weeks is very much behind us. I am sympathetic to that, if only because that's a tough comp, as much of this discussion has highlighted.
Where do we go from here? I’m afraid plenty of damage has been done. Folks as old as I am will remember Gilda Radner and the "Never Mind" bits of Rosanne Rosanna Danna on SNL. We've got 2 of these in the past 2 weeks...April 9 and Trump’s "nah, I won't fire Powell". We've likely moved past peak VIX (50's being a very tough comp). In its aftermath is an overhang of uncertainty that may hamper critical decision making.
To be sure, the earnings engine of the SPX has been formidable. At every turn – through all kinds of uncertainty – corporate America has delivered the goods. But, I see plenty of lingering uncertainties - from the uneven communication from the WH, from the unpriced reactions of our trading partners and from how the market will need to price in the potential economic and corporate profit fallout from the last several weeks.
And some part of this is a function of the reality that "Never Mind" isn't really possible when it comes to markets and policymaking. The inconsistencies, start/stop and incoherence of the strategy matter deeply. In my most recent podcast, Matt King, the founder of Satori Insights, did a wonderful job of laying out the components of the strategy that have reared off course. There’s no crying in baseball. There’s also no take-backs in international trade policy. Almost 40 years ago, Billy Joel told us “It’s a Matter of Trust”. He had personal, not trade relationships on his mind, but it’s an apt statement about the risks that linger from the last few months.
To recap, I, like Scott Bessent, do believe peak VIX is behind us. But unlike him, I do not believe this is a Mag7 problem only. Bessent should follow the advice of one of his predecessors, Tim Geithner, who often said “plan beats no plan”. Markets and trading partners are asking “what’s the plan?”. I think the evidence is mounting that there really isn’t one. And if that is the case, the Mag7 problem is a Maga one as well. And here, markets are vulnerable, to an ongoing overhang of crippling uncertainty.
Let’s finish this discussion with two assets I’ve advocated for strongly over the past several months – gold and bitcoin. I’ve done a number of podcasts on both and I think the thought process is sound and the analysis still highly relevant. Hit up the Alpha Exchange on Apple or Spotify and have a listen. As we sift through the asset price rubble and as the market seeks to get back on its feet, we can glean a good deal of insight from the behavior of gold. It has shined, to say the least. It has emerged in spectacular fashion from what I think we might describe as a “branding exercise”. A financial markets taste test if you will. Over a 2 month period from Feb 19 (the SPX peak) to now, how have sister assets behaved on a relative and absolute basis? This is a period when the VIX reached 52 and the SPX had a max drawdown of 19%. Since Feb 19, the SPX is down 10%, the TLT is flat and the dollar is down 6%. Gold is up 12.5% and bitcoin is flat. If we look at a more narrow slice of time, since April 1st, the SPX is down 2%, the TLT down 3 and the dollar is down 4%. Gold is up 6% and bitcoin up 12%.
About bitcoin, Mike Novogratz also said about bitcoin "it has value because we say it has value". In a fiat system with more than enough US debt floating around the world, we've come to believe the same about both the dollar and the large pile of USTs already printed with many more to come. The dollar and US Treasuries have value because the world has decided so. While there are powerful reasons to believe this, nothing is permanent.
The recent period has been a totally unforced exercise in negative branding for both the dollar and US government bond market. For the VIX to run to 50 and duration not to rally is a bad outcome, amounting to an asset pricing taste test that went poorly. The TLT fell by 3.4% even as the VIX more than doubled, increasing from 22 to 53 from 4/2 to 4/8. Market prices reflect the experiences of investors. This was an unpleasant one for anyone who thought the bond market was there to provide a flight to safety.
Gold’s ascendancy was some part about its negative correlation to the dollar and some part the manner in which it serves as a placeholder for investors needing to express the view that “all is not well”. It, of course, like bitcoin is a FOMO asset. I’ve likened it to a Giffen good, with a positively sloped demand function. Folks chase the return. Gold also recently benefitted from Trump’s Truth Social rant against Powell, threatening to fire him. Even Trump adjusted, many found this unsettling.
Trump’s Tweets are a component of the branding exercise that has taken place over the last several weeks. It’s one that leaves disciplined assets like gold coming out very strongly. As earning season is upon us, Gold will not host a quarterly call. It has no management team, no guidance to offer. It has a brand that, by virtue of the messy start-stop of international trade policy and the unruly back-end of the bond market, is strengthening by comparison.
While Trump has backed-down from the intense broadside on Powell, we should remember that Bessent has talked about a "Shadow Fed". In a recent Bloomberg interview, he suggested they'd start looking at new Fed Chairs in the Fall. It's hard not to see the Fed's independence subject to increasingly overt challenges. This is just one component of an unfortunate US risk: the erosion of governance. It's not one we can easily and readily measure, but it's in plain sight amidst a potentially weakening economy and a mountain of debt at interest rates that look nothing like they did 5 years ago. The ratings agencies (never anyone's favorites, I realize) are paying attention to our capacity to effectively govern ourselves:
Here's Fitch from its Aug 2023 Downgrade of the US Sovereign: "The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to 'AA' and 'AAA' rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions." From Moody's Nov 2023 outlook change from stable to negative: “Continued political polarization within US Congress raises the risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability.”
As you know, I’ve been a huge advocate for exposure to gold with two trade constructions. First, simply having some delta exposure. It had been a consistently trending asset with low volatility and low correlation to the SPX. As uncertainty started to mount in markets, I saw a second trade in gold – and that was the very long dated very far out of the money call. The logic here was that we had not yet experienced a true “stock up vol up” event in gold but that there was scope for it as the tariff uncertainty increase and as the FOMO aspect of gold started to kick in. The Dec 375 call that I advocated for buying for around 1.2 got to around 7 in premium is now closer to 5.
With both "Never Minds" - the tariffs and the fire Powell threat - the near term upside tail outcomes for both gold and bitcoin would seem lower. So the far OTM option plays resonate with me less now. That said, these assets look quite disciplined set against an unpredictable policy backdrop and continue to deserve some allocation in the portfolio. Having had an amazing run in gold, I'd be a little smaller now. But simply put, gold and bitcoin are different. They represent not a vote for, but a vote against. Against an absurd last month in policy and, as a result, markets.
Last point before I let you go and that is on one of the most prize possessions in the US, our bond market. If this one thing you can count on in addition to death and taxes its sizeable auctions of US government bonds. And it’s not to be an alarmist, but simply to state that these auctions must clear for the United States to run. And the auctions do clear. There’s remains large, global confidence in our debt. But when important folks like Steven Miran, now the head of the Council of Economic Advisors, even socialize ideas like user fees on foreign holders of US Treasury securities or encouraging terming out of debt as a way of offsetting a perceived overvaluation of the dollar, the knock-on impacts could be more than unpleasant. White papers might remain white papers, but they may also become socialized enough as to make their way into how investors price distributions. A recent Odd Lots podcast featured a Virginia Law Professor and was entitled “How Trump could Restructure the US debt”. I think its safe to say that restructuring does not involve giving our existing lenders a better deal.
I’ve said this before, the US Ten Year note, not the SPX, is the risk asset. The real “financial” tail risk (i.e. a resurgence) of a spiral higher in the VIX would seem to lie in the potential that long dated UST yields rise quickly. From a contagion standpoint, the 10y note is the vulnerability. It is not being treated as such.
Well, that was a lot. If you got this far, bravo. These are beyond interesting and important times in markets and the global economy. I am thankful for your interest in the Alpha Exchange and hope you have a fantastic week. Until next time.