UBS strategists highlighted a notable increase in the sensitivity of the Volatility Index (VIX) to declines in the S&P 500 throughout 2024, with significant movements observed on August 5 and December 18.
The VIX, often referred to as the "fear gauge," now exhibits a beta of +2 volatility points for every 1% drop in the S&P 500 spot, a marked increase from the previous year.
Shane Carroll of UBS pointed out that the current relationship between the VIX and S&P 500 spot moves has intensified, suggesting a change in market dynamics compared to 2023. This heightened sensitivity could indicate a shift in investor sentiment and market stability.
In light of these observations, UBS strategists are advocating for the purchase of VIX March 2025 call spreads, seeing the potential for profitable outcomes. They argue that owning convex upside positions could be increasingly appealing in 2025, as market conditions evolve.
The strategists also identified market-maker gamma positioning as a possible factor contributing to the recent increased sensitivity between spot prices and volatility. This change in positioning might have amplified the effects of market movements on the VIX.
Additionally, UBS strategists see a seasonal advantage for offshore China equities, though they caution that the market is vulnerable to rapid sentiment shifts, potentially triggered by as little as a social media post.
Despite the risks, they recommend buying February 2025 call spreads on the KraneShares CSI China Internet Fund, suggesting that long options could be a strategic move to capitalize on a potential market rebound.
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