Thread by @_Investinq

Hedge funds are making their biggest bet against fear since 2022.

Nearly 93,000 contracts are stacked against the VIX.

When everyone bets on calm, that’s often when chaos hits hardest.

(a thread)

The VIX is an index that tracks how volatile investors expect the stock market to be over the next 30 days.

It’s calculated from options prices (contracts people use to protect or speculate on moves in the S&P 500).

High VIX = fear. Low VIX = confidence.

Right now, the VIX is sitting below 15. That’s very low compared to its 1-year average near 20.

So the market’s fear gauge is running about 25% below normal.

Think of it like storm insurance suddenly costing much less because everyone assumes the skies will stay clear.

So what are hedge funds doing? They’re shorting the VIX.

“Shorting” means betting the price of something will go down or at least not go up.

In this case, they’re betting volatility will stay low. It’s like betting nobody will need to file an insurance claim.

They do this by using VIX futures. A future is a contract to buy or sell something at a set price later on.

Hedge funds sell VIX futures, expecting they’ll be cheaper by expiration.

If volatility stays low, they profit. If volatility rises, they lose.

Here’s the scale: hedge funds and speculators are net short 92,786 VIX futures contracts as of Aug 19.

That’s the most aggressive bet against volatility in three years.

The last time the numbers looked like this was September 2022.

Why is everyone so confident now? Because Fed Chair Jerome Powell recently hinted at a September rate cut.

That sent stocks higher and pushed the VIX to its lowest level of 2025.

Traders took it as a green light that the Fed has their back.

But here’s the twist: rate cuts often happen when the economy is slowing down.

They can calm investors short-term, but they also signal that risks might be growing under the surface.

So what feels like reassurance can also be a warning sign.

Shorting the VIX looks attractive because of contango. That’s when VIX futures are priced higher than the actual VIX index.

By shorting, funds can profit as those futures roll down toward spot.

It’s like renting out insurance month after month and pocketing the premium.

But when stress hits, the curve flips to backwardation. That’s when futures suddenly become more expensive than the index itself.

In that setup, shorts bleed money fast.

It’s why the short-volatility trade can be steady for months… until it explodes in days.

History proves this. In Feb 2025, stocks peaked. Then Trump’s global trade war threats spooked investors.

Volatility jumped, and hedge funds who had shorted the VIX were forced to buy back contracts at huge losses.

Calm flipped to chaos almost instantly.

Same story in July–Aug 2024. Funds were shorting the VIX aggressively in July.

Then the yen carry trade collapsed in August (where investors borrow cheap yen to invest elsewhere).

Global markets cracked, and short-vol bets blew up.

When volatility spikes, a dangerous loop kicks in. Traders rush to cover shorts, pushing the VIX even higher.

Dealers who sold options hedge themselves by selling stocks or futures.

That extra selling pressure drags markets down further, feeding the cycle

This is called short gamma. It means dealers must constantly adjust their positions as prices move.

When volatility rises, they sell stocks to hedge, which worsens the decline.

It’s one reason volatility events feel so violent once they get started.

The important point isn’t that a crash must happen tomorrow. It’s that the market is fragile.

When almost everyone is betting on calm, the system becomes hypersensitive to surprises.

Even a small shock can trigger a big, self-reinforcing reaction.

And remember: the CFTC data doesn’t capture everything. It misses exchange-traded products (like volatility ETFs) and more complex hedge fund trades.

But even the visible data shows the most aggressive short-vol stance since 2022.

That’s a flashing signal.

Why do hedge funds keep coming back to this trade? Because in calm periods, it’s reliable income.

You collect small profits daily, month after month.

But it’s like picking up pennies in front of a steamroller profitable until the roller finally lurches forward.

Bottom line: hedge funds are shorting the VIX harder than at any time since 2022.

Calm looks cheap. Powell looks dovish. Traders are confident.

One spark could flip calm into chaos and catch everyone offsides.

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