The Dark Side of VIX - Mar. 6, 2025

My Journal

machinaquanta.com

I think we’ve managed to keep our cool fairly well during this early stage of volatility expansion. I started nibbling at buys this week as we were reaching some inflection points and indicators were point towards buy signals - safe to say I’m early. As you probably feel, it is not easy withstanding 100-200 pt swings daily as this is not the norm, of course. This is the dark side of VIX because it means we can swing +/-1.5% in a ‘normal’ day now meanwhile for most of 2024 we were lucky to get 10-15 pt swings many days *yawn*. The key to surviving now is to size small to allow your idea to play out once you have enough confidence to put money in your idea.

Before we do the review: paid subscribers you have access to machinaquanta.com so you can view Bender at your leisure and watch the educational video on it. I think you might find it a helpful tool (among many) in your decision making.

Weds. Mar 5

We saw buyers step in on Wednesday. While I was flying I provided short commentary that vol sellers had started to come in, which is supportive of prices, but we’re still not out of the woods yet. The unfortunate part is that I was not able to update Bender before market close (as I was in the middle of the Pacific on the way home). By end of day I noted that Bender paused its upswing which, in this market, has usually resulted in pullbacks within 1-2 days. The issue is that as VIX continues higher, hedging becomes increasingly more expensive with puts and it is harder to make money on hedges if you are buying puts when vol is already high. Instead, you have to manage what cash position you have and just ride the wave. I have to remind myself that the bottom, wherever it may, be will take longer than expected. It always takes longer than expected - be patient and size down.

Thrs. Mar. 6

Well that didn’t take very long for SPX to react to Bender as SPX went down ~100 handles on the day. Now that VIX is nearing 25, I see the market as well hedged for large moves and you can see it in the large premium of put option prices. However, looking below, a high VIX does present opportunities for reversal. See the relationship between bottoms and high VIX. Sure, VIX can go higher but it becomes increasingly difficult for that to happen as VIX needs increasing bids to sustain its level otherwise vol sellers come rushing in. My commentary during the chat was: “We can still head lower, sure, but statistically it is still higher risk to be short unless you really really think VIX will blow up and we have very bad economic picture coming. Play the data you have in front of you”.

I’m surprised that the selloff has been very controlled this whole way down. That could partly be explained by the fact despite a relatively large selloff, the VIX has been very tame. This tells me that investors are already well hedged and have loaded up on puts. For a minute I entertain the idea of what would happen if bad news is not as bad as expected when the market is this heavy in hedges? We’ll find out on Friday but you know how I’m positioned for it.

By the end of the day, Bender ‘recovered’ and ended up flat after dropping in the morning. These selloffs can go longer than expected but Bender is not showing signs of contagion or financial stress. Again, these selloffs have been quite controlled so far and the divergence is becoming quite large now (between Pullback Indicator and SPX). Remember we saw large divergence on Feb. 14 and it took at least a week for SPX to react.

Interestingly, GEX or gamma exposure, is failing to make new lows showing how controlled these selloffs have been. GEX is now potentially making a triple bottom despite SPX selling to new lows. We’ve seen before what happens to SPX after. Either that or we snap down and selling would accelerate. Let’s keep an eye on this still.

Source: https://squeezemetrics.com/monitor/dix

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