VIX

Learnings From Trading Short Volatility Funds, 1. The Tantalizing Promise of Quick Riches

Scott Buchanan1 Comment

The VIX is a calculated measure of stock market volatility, based on the prices of stock options. It spikes up when there is a market upset, then seemingly always settles back down again after a few days or weeks. So, it seems simple to make a quick profit from this behavior: short the VIX when it spikes, and then close your trade when it comes back down. What could possibly go wrong?

VIX Index, May 2024-April 2025. From Seeking Alpha.

It’s a bit more nuanced than that, since you can’t directly buy or sell the VIX. It is just a calculated number, not a “thing.” However, there is a market for VIX futures. The value of these futures is based on expectations for what VIX will be on some specific date. The values of these futures go up and down as the VIX goes up and down, though there is not an exact 1:1 relationship. There are funds that short VIX futures, which are a proxy for shorting the VIX futures yourself.  So, the individual investor could buy them after the VIX spikes (which would drive down the short VIX fund price), then sell them when VIX declines (and the short VIX fund goes back up).

The chart below shows the VIX (% change, orange curve) in the past twelve months prior to May 1.   There were three episodes (Aug 2024, Dec 2024, Apr 2025) where VIX spiked up. These episodes are marked with green arrows. As expected, when VIX spikes up, the short volatility fund SVIX (purple line) drops down. In August and December, if you were clever enough to buy SVIX at its low, you could turn around and sell in a week later for a good profit. The movements of SVIX are dwarfed this plot by the gyrations of VIX in this chart, but a couple of short red horizontal lines are drawn at the bottoming values for SVIX, to show the subsequent rise. A 3x leveraged S&P 500 fund, UPRO, is shown in blue.

There are important nuances with these funds. One is that a long or short VIX futures fund, at the end of the trading day, must buy and sell some futures shares to meet their performance mandate. As of say May 1, the -1X VIX fund SVIX was short 14,311 May VIX futures contracts (expiring 5/20/2025), and short 10,222 June futures (exp. 6/17/2025). To keep its exposure centered at on one month out from the present date, the fund must buy back some near month (here, May) contracts each day, and short some additional next month (June), at the close of every trading day. If the market value of the near month VIX futures contract is lower than the next month contract (being in “contango”), as it generally is during periods of low volatility, this rolling process makes money every day, to the tune of maybe 5% per month. That compounds big time over time, to over a 60% gain in twelve months. That’s the good side. The VIXcentral site shows current and historical VIX futures prices for the next several months out.

A bad side of these short funds is that the day-to-day inverse movements can rachet the fund value down and down, as VIX goes up and down. So even if the VIX ends up in six months at the same value as it is today, it is possible for a short VIX fund to be lower or higher. This can lead to a more or less permanent step down in fund value. Also, in volatile times, the near futures price is higher than the next month out, and so the daily roll works against you.

There is a term that trading pros use for amateurs who jump into volatility funds without really knowing what they are doing: “volatility tourists”. These hapless investors sometimes hear of big profits that have been made recently in vol, and then buy in, often at what turns out to be the wrong time. Then market storms arise, things don’t go the way they expected, and they get shipwrecked.

Such was the case in 2018. SVXY at that time was a fund that moved inversely to volatility futures, on a -1X daily basis. This short vol trade made insane profits in 2H 2016 and in 2017, far outpacing stocks. Someone who bought into SVXY at the start of 2017 would have quintupled their money by the end of the year. (See chart below, orange line).

However, February 5, 2018 is a day that will live in volatility infamy. Because of the roaring success of short VIX in the previous two years, investors had piled into short VIX ETFs. The VIX suddenly doubled that day, and the short vol funds could not do the daily futures trades they needed, and so their value was decimated. This event is known as Volmageddon. The chart below shows the rise (and fall) of the -1X VIX fund SVXY in orange, compared to a stodgy S&P 500 fund SPY (in green).

Folks who bought SVXY looked like geniuses, until Feb 5. Then they lost it all, more or less. The tourists licked their wounds and moved on, and short vol went clean out of fashion for a while. One short VIX fund, XIV, actually an exchange traded note (ETN), went to zero and closed. SVXY itself lost over 90% of its value. After this near-death experience in 2018, SVXY contritely modified its charter from being -1X VIX futures to being -0.5X. That reduces its exposure to vol shocks. That modification served it well in March, 2020 when the world shut down and VIX shot to the moon and stayed there for some time. SVXY lost something like 70% of its value then, but it lived to trade another day, and slowly clawed its way back.

However, short vol has made a comeback in recent years. The -0.5X SVXY was joined in mid-2022 with a new -1X VIX fund, SVIX (for investors who don’t remember what happened to -1X funds in 2018! ). Short vol actually had a very good run in 2022, 2023, and first half of 2024:

The chart above shows SVIX ( -1X, purple) and SVXY (-0.5X, blue), along with the S&P500 (stodgy orange line) over the past three years. The two inverse vol funds totally smoked the S&P through July, 2024. Investors in SVIX were up over 300%, compared to 35% in stocks. Even the more conservative vol fund SVXY was up 165%. Yee-haw!

The volatility tourists poured in, and then came August 5, 2024, with a short, sharp, unexpected spike in volatility. As we noted earlier, it was not so much that stocks cratered, but there was a hiccup in the global financial system, mainly around unwinding of the yen carry trade. The values of the short vol funds got decimated. Then the recent brouhaha over tariffs in April 2025 whacked them again. This drove the value of SVIX below the three-year rise in stocks, although SVXY still outpaces stocks (57% vs 35% rise).

There were dips in SVIX and SVXY in March 2023 (Silicon Valley Bank blowup), October 2023 (Yom Kippur attacks on Israel by Hamas), and April, 2024, corresponding to spikes in VIX. In those cases, it worked great to buy the dip, since within a few months SVIX and SVXY churned to new highs. Many were the articles in the investing world on the wonderful virtues of the daily VIX futures roll. But then August 2024 and April 2025 hit, where there was no complete, rapid recovery from the huge price drops.

What to take away from all this? What comes to my mind are well-worn truisms like:

If it looks too good to be true, it’s probably not true; There is no free lunch on Wall Street; It’s not different this time.

The reason I know this much about these trading products is that I got sucked in a bit by the lure of monster returns. Fortunately, I kept my positions small, and backstopped some trades by using options, so all in all I have probably roughly broken even. That is not great, considering how much attention and nail-biting I have put into short vol trading in the past twelve months.

In an upcoming post, I will report on an alternative way to trade volatility spikes, which has worked out much better.

Disclaimer: Nothing here should be considered advice to buy or sell any security.

The Best Investments of the 1970s

James Bailey4 Comments

The tariffs still have me thinking about buying VIX calls and stock puts (especially when policy changes loom on certain dates like July 8th), and on the bigger question of finding the sort of investments that did well in the 1970’s, another decade of stagflation that was kicked off by a President who broke America’s commitment to an international monetary system that he thought no longer served us.

That’s how I concluded last week. So this week I’ll answer the question- what were the best investments of the 1970’s? When the dollar is losing value both at home and abroad, holding dollars or bonds that pay off in dollars does poorly:

Source: My calculations using Aswath Damodaran’s data

Stocks can do alright with moderate inflation, but US stocks lost value in the stagflation of the 1970’s. Foreign stocks and commodities generally performed better. Real estate held its value but didn’t produce significant returns; gold shone as the star of the decade:

Source: My calculations using Aswath Damodaran’s data

Gold is easy to invest in now compared to the 1970s; you don’t have to mess with futures or physical bullion, there are low-fee ETFs like IAUM available at standard brokerages.

Of course, while history rhymes, it doesn’t repeat exactly; this time can and will be different. I doubt oil will spike the same way, since we have more alternatives now, and if it did spike it wouldn’t hurt the US in the same way now that we are net exporters. Inflation won’t be so bad if we keep an independent Federal Reserve, though that is now in doubt. At any time the President or Congress could reverse course and drop tariffs, sending markets soaring, especially if they pivot to tax cuts and deregulation in place of tariffs ahead of the midterms.

Things could always get dramatically better (AI-driven productivity boom) or worse (world war). But for now, “1970s lite” is my base case for the next few years.

Why Is Stock Market Volatility ( VIX ) So Low?

Scott Buchanan1 Comment

What is the VIX and why should you care? The CBOE Volatility Index (VIX) is a measure of the expected near-term price swings in the S&P 500 stock index (SPX). The VIX value is derived from the prices that market participants are willing to pay for options that expire roughly 30 days in the future. Typically, movements upward in VIX correspond to movements downward in broad market averages, since price volatility is usually associated with some “problem” cropping up. During market turbulence, the VIX can shoot up very high, very fast, with a percentage of change far higher than for stock prices.

The VIX is know as the “fear gauge,” since it provides a standardized measure of market volatility expectations. It is thus a number that conveys significant information about the attitudes of market participants. Also, it provides opportunities for investors to make (or lose) a lot of money quickly. You cannot invest directly in the VIX (it is just a calculated number), but you can buy/sell VIX futures and options on those futures. Also, there are convenient funds that buy (e.g., VXX) or short (e.g., SVIX) the VIX futures. Because the VIX makes much bigger percentage moves than stock themselves, you can make a killing with a modest investment, providing you get the timing right.

For instance, over the past twelve months, the SPY S&P 500 fund has gone up by about 18%, so $10,000 would have gone to $11,800. That’s pretty nice. But in that same period, SVIX went up by 143%, which would take $10,000 to $24,300 (see below).  (Nerdy notes: (a) SVIX shorts the VIX, so it generally goes up when VIX goes down, i.e., when stocks go up. (b) There is another factor with SVIX called the monthly roll, when tends to make it rise something like 2-4% a month on average. This monthly roll factor is layered on top of the rise and fall in SVIX value based on VIX level. So even if VIX is flat, SVIX may go up something like 30% in a year. )

SVIX and SPY share prices for the past year. Source: Seeking Alpha

Of course, the price swings on SVIX cut both ways. It is down hugely from its highs a month ago, as VIX has increased from roughly 14 to 20. You can go even more crazy by purchasing/shorting VIX-related funds like UVXY that are leveraged at more than 1.0X.

Even you were even more clever, you could have made even more, much more, by working VIX options. Also, if you just want to hedge your stock portfolio against sudden drops, it is often more economical to do that by buying (call) options on the VIX, than by buying (put) options on the stocks (e.g., SPX, SPY) themselves.

During long periods of market stability, the VIX tends to slowly drift downward, to an asymptote  somewhere in the 12-13 range. For example, in the five-year plot below, VIX spend much of 2019 around 13, then shot up over 80 within a month when the scope of the COVID pandemic became apparent. It then drifted downwards (with many spikes along the way, especially during the big bear market of 2022), getting down to around 14 for much of June-September of this year.

VIX Level for past five years. Source: Seeking Alpha.

It is notable for VIX to be this low, considering a number of serious current market concerns (the relatively high valuation of the stock market, stubborn inflation, hawkish fed, gridlock in Washington, etc.). And now with serious conflict in the Middle East resulting from the massive attacks on Israeli civilians, the VIX has so far only risen to 20.

A number of market commentators have noted the seemingly anomalously low level of the VIX, and have proffered various explanations. They observe that macroeconomic outlook continues to look probably OK. They also point to some fundamental changes in the stock market operations. One factor is the rise of zero-day options, very short-term stock options that expire within one day. More of the speculative action has gone to those options, with proportionately less in the month-out options that drive the VIX.

Also, the stock exchanges have implemented various “circuit-breakers,” which halt trading for specified time periods, if swings in stock prices get out of hand. This gives participants a chance to cool off and recalibrate, and not have to make frantic, quick (possibly losing) trades in order to protect themselves. Here is a diagram illustrating these circuit breakers, which are triggered by big moves in the broad S&P 500 stock average:

 Source: Seeking Alpha, article by Christopher Robb

There are also Limit Up/Limit Down (LULD) rules in place that temporarily halt trading in an individual stock if its price swings exceed some designated band.  is designed to stop excess volatility in a single stock.  With these protective circuit-breakers in place, market participants seem less worried about huge price swings coming at them, and hence may feel less of a need to “buy insurance” by purchasing options. This suppression of stock option prices in turn leads to a lower calculated VIX.

As usual, this blog post is not meant to be advice to buy or sell any security. (And seriously, the “never bet more than you can afford to lose” rule applies doubly with the high-volatility products discussed here).