Speculators short the VIX

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I lived through the 2008 financial crisis at HSBC. I know this eerie calm. Earlier in my career, I built volatility indices for different regions by collecting option prices, extracting their implied volatilities, and weighting them to create a single fear gauge for each market.

You can build similar indices for bonds (like the MOVE index for US Treasuries) or any market where options trade actively. My observation is that a low VIX isn't a comfort blanket, but rather a warning sign. The market grows complacent. Risk builds silently beneath the surface. It reminds me of security before a terrorist attack: everything feels safe even though danger lurks. Afterwards, everything feels dangerous even though the streets are actually safer because of greater security. Today's VIX below 15 doesn't signal safety. It signals that nobody's looking for the exits anymore, precisely when you should know where they are.

CHART 1 • Speculators short the VIX

Speculators now hold their largest net short position in VIX futures since September 2022 – a massive 92,786 contracts as of 19 August, according to CFTC data. This represents a stunning vote of confidence in continued market tranquillity, with the VIX currently languishing below 15, roughly 24% below its one-year average.

The S&P 500 has been grinding higher, hitting multiple all-time highs in 2025 despite slowing earnings growth and persistent inflation concerns. But here's what should worry investors: extreme positioning like this has historically preceded violent reversals. In July 2024, similar crowding preceded the August yen carry trade collapse that roiled global markets. The setup mirrors previous volatility spikes that caught traders offside – when everyone's on the same side of the boat, it doesn't take much to tip it over.

Source: Bloomberg

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