Last Friday, my process got us short the Nasdaq.
It also kept us from doing something that probably looked enticing over the past few weeks: buying volatility.
That second part is what I want to walk you through today. When markets start to wobble, the instinct is to reach for protection. SPX puts, VIX calls, VX futures, or some VIX ETN. Sometimes that’s exactly the right move. As of Friday, the volatility market was telling me it wasn’t, and understanding why is where a lot of the edge lives.
A quick refresher if we haven’t met. I study the volatility complex and share my takeaways with the Collective every week in my videos series, Vol Street Journal. I also run a positioning-based, mean reversion futures strategy in the MacroOps book. Most weeks those two jobs live in separate rooms. Last week they sat at the same table.
Where We Started
In my last dispatch, I told you the volatility market was calm and resilient. The VIX futures curve was in contango, VIX sat below the entire curve, and this gave us confidence to add to our long Nasdaq exposure.
Then the market tone changed. We cut our Nasdaq position and started trimming risk more broadly.
On Friday, October 16, a widespread sell-off inverted the front three months of the VIX futures curve. The AI and semis trade had been unraveling all week, but healthy rotation kept a lid on vols. The Dow, the big banks, Apple, and a handful of non-growth mega-caps took turns holding the market up. When they rolled over and joined the laggards, the vol market woke up.
An inverted curve sounds like an invitation to buy vol. The details said otherwise.
We strongly overvixed on the 16th. VIX options volume surged to nearly 2.5 million contracts. But in the final third of the session, as the S&P printed lower lows, VIX and VVIX printed lower highs. That’s panic exhausting itself, not panic building. Meanwhile, the gap between VIX and S&P realized vol jumped to nearly 10 points, a rich premium by most standards.
In other words, the fear was already priced. Generously.
The Onus Shifts to the Bears
The following week, the S&P made another lower low, led by the Nasdaq, yet VIX and VVIX both failed to make new highs. The front of the VIX futures curve flattened out, with only about two vol points from the lowest contract to the highest, but VIX stayed below the futures.
This is where a lot of traders get tripped up, so it’s worth slowing down.
A flat VX curve with VIX in the low teens is dangerous. A flat curve with VIX near 20 is a different animal. Once vols are elevated, it takes more fuel to keep them there and even more to push them higher. Moving VIX from 20 to 40 takes far more effort than moving it from 12 to 24. A market that simply grinds lower isn’t enough.
My read on Vol Street Journal that week was this: it was a difficult environment to be long volatility, but not one for adding risk either.
One more detail mattered. If there was a long vol trade to be had, it was in the Nasdaq, not the S&P. VXN spiked while VIX held back. The stress wasn’t spread evenly. It was concentrated in one place.
Friday: The Setup Triggers
While the vol market was telling me where the stress lived, positioning was telling me who was exposed to it. Speculators were still long the Nasdaq, and crowded positioning is exactly what my strategy hunts for.
A series of strong earnings out of key AI players was met with “news failures” in the Nasdaq, i.e., bad price response to good news. These news failures stacked up between October 8 and 28. The tape was heavy. Two ugly weekly candles in a row gave us a clean entry point. We placed our order and waited for the market to pull us into the trade.
Then came Friday, October 30.
For the first time in a while, the major sectors sold together. Average correlation across the S&P, Nasdaq, Russell, and Dow jumped in a single session. The Russell, the Dow, the banks, and the semis offered no support. S&P 21-day realized vol broke above its recent range near 10. Implied and realized correlations snapped higher.
Those are the market mechanics I had flagged as the tell. They broke, and we were ready.
Why the Nasdaq and Not Vol
Friday’s session also showed exactly why I stayed away from volatility.
As the S&P sold off hard into the afternoon, VIX pushed toward 24 and VVIX toward 124. Then the market caught itself. VIX fell fast into the close, and on net we ended up undervixed on the day after strongly overvixing earlier in the session. Anyone who bought protection into the afternoon flush gave a big chunk of it back within hours.
That’s what happens when hedges get monetized the moment the selling pauses. Here’s how I weighed the two expressions of the trade:
The premium was already paid. With implied vol still running roughly 8 points over realized, buying vol meant paying up for insurance that was already priced rich. Realized vol would need to climb a long way just to break even.
The base was already high. Vols were elevated and the curve was flat with almost no cushion. Less room to run, more fuel required.
Timing. Long vol needs speed. If the move is slow, decay and roll do the damage before the thesis plays out. A short futures position with a defined stop can afford to wait.
The vulnerability lived in the Nasdaq. That’s where the stress showed up in vol, and that’s where speculators were crowded. The cleanest expression of the view was the underlying itself.
One of my trading mantras is “don’t get cute.” When the vol market is telling you protection is expensive and the setup is in the index, you don’t need a clever structure. You need the right market, the right size, and a stop.
Managing the Risk
We entered with clearly defined risk and a price point that invalidates the trade.
The trade is live as I write this. It’s working well but that could change. That’s fine. A defined loss on a sound process is part of the job. What I want you to take away isn’t the outcome. It’s how the pieces fit together.
What I’m Watching Now
A lot has changed since we initiated our short Nasdaq position. Today, November 5th, equities are in freefall and the volatility market is responding in kind. Being long volatility is paying but it has been an incredibly difficult trade - much harder than just being short Nasdaq. If you were long volatility into the mid-term elections, you got crushed the day after and likely closed out. And now VIX is up 10 vol since then, leaving many vol traders behind.
Correlations continue to be what I’m watching most closely.
Implied correlation (COR1M) made a big move today, but it’s still well short of the 30s and 40s you see in a true correlation event. For long volatility to continue to work, realized and implied correlations will need to keep climbing together. If equities don’t catch themselves soon, the odds of that happening increase.
Why This Matters
This is what the Collective is really about. Not a stream of trade alerts, but a process where macro, volatility, positioning, and risk management all inform one another. Alex’s big-picture work, Brandon’s hunt for value, Dean’s regime tools, Mike’s work on the psychology of it all, and my weekly read on the vol complex. Each piece makes the others sharper.
If you’ve been following along from the sidelines and want to see this process unfold in real time, enrollment in the Collective is open. As MacroOps moves into its next chapter, prices are set to nearly double. If that’s a step you’ve been considering, now is a good time to take it.