WHAT IS THE VIX?
Let’s start with the basics for those new to the topic. The VIX is the market’s "fear index." It measures the volatility of the S&P 500 and reflects investor uncertainty.
When investors panic, they sell off massively, and the VIX rises. On the other hand, when the market calms down, the VIX drops.
Historically, every time the market crashes, the VIX skyrockets—but sooner or later, it returns to lower levels. Unlike stocks or bonds, the VIX doesn’t represent a specific asset value but rather the market’s overall dynamics. That’s why, when it spikes too high, it's almost certain that it will eventually revert to more normal levels.
HOW TO PROFIT
This is where short selling comes into play. If we bet that something will go down, shorting it can generate profits when the price drops.
Just as a reminder, let’s look at what we did in August. When the VIX surged past 60, it was almost certain that it would eventually drop back below 20.
WHY NOT NOW?
Now comes your question—why didn’t we do the same thing this time? There are two main reasons:
(a) Trump’s Presidency
With Trump in the White House, volatility is likely to stay elevated for a longer period. He’s only been in office for a few months, and he’s already turned everything upside down!
This means the VIX could remain at higher levels, making it unclear when the right entry point for a short position would be.
If the VIX stays between 20-30 for months, then a short trade could end in losses instead of profits. I don’t want to short an index that might remain high for an extended period.
(b) Unclear catalysts and timing
In August, the high volatility was due to short-term factors, and it was obvious that things would calm down soon.
Now, however, I don’t have a clear catalyst indicating that the market will quickly return to stability.
As I have said, markets can stay volatile for a long time, and high volatility doesn’t necessarily mean an immediate reversion to normal levels.
So, just because the VIX has risen to 26 doesn’t automatically make it a great shorting opportunity. Personally, I’d find it more attractive above 30.