The madness around semiconductors did indeed reach South Korea, and the performance of companies like Samsung or SK Hynix explained in large part the day-to-day of the index. Lately, the volatility in the space is higher than usual, and that also shows in Korea. How did that play out for us? It was rocky, to say the least; it is now the second time we put this trade on and the high level of realized volatility means you need to be comfortable holding this position through pretty wild swings — amplified these days by all the different views, theories, and speculation around AI.

Although this trade turned out to be another winner, it should trigger another reflection about your own risk limits; as an option seller, you act as an insurance provider. And it is totally fine to focus on a segment of the market where the customers are inherently less risky. With realized volatility these days above 55% (not exactly your pristine AAA, but more like a borderline junk profile), the risk of a jump or an erratic move is high in a product like EWY. If you prefer a smoother risk profile and less risky situation (lower realized volatility to begin with and anything below 40%), there is nothing wrong with that at all.

Trading doesn’t have to be complicated, and it doesn’t have to be scary either. It will be stressful once in a while, that is ultimately the reason why you are being paid, but you are in control to which extent you are willing to lend your balance sheet. Do not let the market decide for you.

The trade

In our Signal Du Jour from two weeks ago, we brought to your attention that the 173/240 strangle in EWY expiring June 26 may be overpriced when one considers the risk embedded in the options market relative to what the index was actually showing.

At the time, our models were showing some pretty strong odds that implied volatility would exceed the subsequent realized volatility measured over the next 30 days. We also thought that implied volatility had good odds of coming down, which would have carried our PnL for a bit. However, we were mindful that realized volatility was likely to go up, with a probability of 85%. That said, this is an indication of direction, not magnitude: an 85% chance of going up means just that — not that the move will be explosive on the upside.

In the end, things happened pretty much like we expected them to: IV initially declined from roughly 77% to 72%, while realized volatility went up from 55% to 58%. Looking at it like this, nothing our position could not have handled, right…?

That is obviously putting aside the spike in implied volatility at the back end of last week, when a rout in tech stocks — and in particular semis — hit markets worldwide. Korea was not spared, and the resulting selloff was always going to hurt our non-delta-hedged position.

The underlying was roughly at $200 when we entered the position; it then ran up close to $220 before cratering down to $175. Needless to say, with gaps like this, your volatility-premium-harvesting thesis will suffer a little bit, as the market rushes for hedges and inflates the price of your straddle.

Yet, despite these pretty impressive moves, our position showed some decent profit midway through last week, before the relentless move down that prefaced what would happen in the US stock market last Friday.

Here is another reason why we often say to take profit sooner rather than later: in many volatility trades, you can let the thesis play out, hold, and make a bet on the terminal distribution. But in markets where realized volatility is already high and the gap risk is non-negligible, that is asking for trouble.

Let’s have a look at the Greek PnL attribution.

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The Greek PnL Attribution

Looking at the attribution, this was a tug-of-war between Theta and Gamma, with Vega leaning against us almost the entire way and Delta — of all the Greeks — casting the deciding vote. We collected a little over $580 of rent across the two weeks and handed almost all of it straight back to the convexity we were short. That is the trade in one line: we sold insurance on one of the most volatile products on the board, then spent the holding period paying claims.

Start with the rent, because it is the only Greek that behaved. Theta accrued steadily for the full two weeks to roughly +$580, the single largest positive contributor. It does not care about the headlines on Samsung or the tape on Friday — it simply collects, one decaying day at a time. In a normal week, that $580 is the entire PnL. This was not a normal week.

Gamma is where the money went. We were short a strangle, which means we were short convexity, and EWY spent two weeks doing precisely what convexity punishes: large, gapping moves in both directions. Cumulative gamma finished near −$680, more than enough to swallow the theta we collected. This is the structural cost of selling options on a name realizing north of 55% — you are paid to be short gamma, and then you actually have to be short gamma.

Vega was the persistent headwind. Implied volatility never gave us the clean compression we wanted: it dipped early, from roughly 77% to 72%, then snapped higher as the semiconductor rout peaked. Cumulative vega settled around −$220. The cruel part is the timing — vega hurt most precisely when gamma was already hurting, because a selloff inflates implied and realized vol at the same time. There is no diversification between your Greeks on a day like Friday.

And then there is Delta, the Greek we explicitly chose not to hedge — usually the line that ends a post-mortem in tears. Here it was the opposite. Because we let the position run unhedged through the entire round trip — $200 up to $220, back down to $175, then a partial recovery — delta finished around +$330 to the good. That is luck wearing the costume of a Greek: the path simply handed the strangle back its center of gravity. Net it out — theta and delta pulling one way, gamma and vega the other, with the second-order terms tipping the balance — and the book closed a little over $160 in the green.

This is why the daily chart matters more than the cumulative one. Midweek, with the underlying back in the middle of our range and delta quietly canceling the gamma bleed, we were sitting on our best mark of the trade — comfortably above $300. That was the moment to take the 25% and walk. We did not, and on Friday the 5th the bill came due: a single session erased close to $500 as gamma and vega detonated together. It took Monday's bounce to drag the position back into modest green. The lesson is the one we keep repeating — in a product already realizing 55%+, with gap risk this real, holding out for the last dollar stops being a volatility trade and becomes a directional bet you never meant to make.

After these wild swings, the only question left to answer is whether or not we should roll the position.

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And it wasn’t just the stocks: silver lost more than 8% while gold was a little better at -3.5%. The oil complex was also down. In the end, except for rates, which stayed pretty much the same, this had all the characteristics of a bloodbath: liquidity being pulled out of the system while everyone rushed into hedges and safety. As a result, the VIX closed at 21.59 (despite the glitch in TradingView showing it right above 20).

The reason? Pretty straightforward, or very convoluted, depending on how lenient you want to be with the market these days: with 172k jobs instead of the expected 80k, the economy is running hot. Too hot. And for sure, the Fed will have to hike, especially with how the price of oil has behaved over the last four months.

Right. We’ve heard that one before, but after years of looking at the market, we’ve never seen a good justification for shorting an economy that is doing just fine. And we can’t remember a bear market starting because the economy was going creating job. Sure, we’ve seen these blips, but those are, well... rarely anything more than temporary. And if we were allowing ourselves a little macro observation, it is actually interesting to note every single asset class being obliterated on Friday except… the one that is supposed to react to inflation and potential rate cuts, ie TLT and the long dated run. Sure they strenghented but nothing in comparison to the movement in equities.

Yet the move is respectable, and it is important to do our due diligence and look carefully. You’d be a fool to ignore that spike: the VIX going from 15 to 21 is enough to pay attention to, and to at the very least assess whether you want to be the insurer of last resort.

Spoiler alert: absolutely.

Let’s start with the chart above: despite the respectable spike (once again, 6 VIX points are not to be taken lightly), our regime model is detecting a positive VRP regime — much more a regime favorable to option sellers trying to harvest the risk premium between implied and realized volatility than a regime of stress. Obviously, let’s see how the beginning of next week goes: if things stay agitated, we may start to see a few orange dots; however, that isn’t the case at the moment. What could be the catalyst? The never-ending saga between Iran and the US: we learnt last week that they were still playing with fire in the Strait of Hormuz, that Iran had unilaterally withdrawn from the negotiations over the unreasonable demands from Uncle Sam, while at the same time, that the discussions were showing great progress.

But apart from that, things are pretty light. Sure, we will have some actual inflation data this week; however, the move seems a little blown up for what is likely to happen: you currently have a staggering 8 to 12 points of premium along the term structure between what we just realized and what the options market implies for the next 30 days.

So let’s take a step back, while we still have some fresh memory of agitation and uncertainty in the market: remember the peak of the Iranian crisis in April, where Trump was raging live on social media, threatening “these bastards” with a return to the “stone age”? We were flashing realized volatility at 19 back then. Do you really think that over the next 30 days — especially with the 4th of July falling in 27 of them, and the SpaceX IPO — we are likely to see more price movement than at the peak of a Middle East war?

Everything is possible, obviously, but at the moment our forecasts are lazily pointing towards a slight push higher to 13 and not really more than that. And why would it be otherwise? On Friday — which, again, was a pretty steep decline in stocks and in dollar-denominated assets in general — the daily realized volatility was … right below 20%. Is that a lot? Not really — all in all, a fairly average day under the sun from a realized volatility perspective.

Over the last three years, it would sit right in the middle of the daily range. In comparison, Friday was the equivalent of a calm day during the six weeks of intense uncertainty in March and April. Once again, that doesn’t mean continuation is not possible. It can absolutely keep tanking over the next few days, and one will have to watch how the market behaves Monday and Tuesday. But without any meaningful increase in the daily movements, the options prices will start to hurt pretty quickly, as the premium evaporates and the risk that fund managers have hedged against doesn’t materialize.

If you ask us, this is typically the type of scenario where everybody wants to be a volatility trader, but when the demand for options is there — loud and ferocious — many discover that trading mean reversion on some supposedly more professional and quantitative asset class is no simpler than vile speculation on crypto, CFDs and other prediction markets. Don’t go all-in, obviously, but short the straddles and come back right before the 4th of July to see if the world really blew up.

In Other News

We have never hidden our disdain for Saylor and the MicroStrategists, and we won’t hide either that it is with a certain delight, and a mouth full of popcorn, that we are watching the price of MSTR tank week after week as the promise of a perpetual rise in bitcoin prices — meant to support a stock price designed to funnel hard cash raised from the public into crypto assets (and also into the pockets of its chairman, but that is beside the point) — fails to be fulfilled. Saylor and MSTR had to sell some bitcoin this week to honor their dividend strategy, and obviously the market noticed. Long story short, the company is now sitting on a pretty hefty unrealized loss of a little more than 11 billion dollars. Of course, all it needs is a nice little run in bitcoin for all of that to be forgotten. The problem is that bitcoin has some steep competition these days when it comes to liquidity: investors need cash for all the recent financial innovations — prediction markets and their very appetizing perpetual contracts and, obviously, the big and beautiful IPOs, IPOs like you’ve never seen before, so big and beautiful that everything is made for retail investors to participate. Finance is no charity, and when the entire industry is doing everything it can for arguably the least informed participants to dabble in it, one has to wonder what its true motivation is. You can ask Saylor — a man who, as a reminder, was charged with accounting fraud by the SEC 25 years ago, right before the dot-com crash, and settled without admitting wrongdoing — we are sure he would be pretty pleased to find some more degenerate liquidity so he could keep exiting his scheme.

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Thank you for staying with us until the end. As usual, here are two great reads from last week:

• We were always dubious about crypto, but we strongly believe that prediction markets can become a much, much bigger instrument than what options and futures markets on stocks have ever been. Case in point: this article from CNBC showing how a bar hedged itself during a Knicks NBA playoff night.

• We have spent our days playing very few video games, but Age of Empires was one of them. And when we saw a research paper trying to demonstrate that if LLMs had “human-like” capacities, you could argue that Age of Empires has the same (?!!), we were immediately interested. This is a great paper about how poorly defined hypotheses and methodology can lead humans to the conclusion… they want to hear.

This is it for us. We wish you a wonderful CPI week ahead and, as usual, happy trading.

Ksander

Homebuilders never got the memo. While equities relaxed, the long end of the curve did not, and that is the one place where housing has no defense. The Iran war has kept energy prices elevated, inflation has stayed sticky, and the thirty-year yield has spent the spring at levels it had not seen since before the financial crisis. Mortgage rates followed it straight back toward 7%. For a sector whose entire business model is a customer's monthly payment, the rate is everything.

XHB, the SPDR S&P Homebuilders ETF, has worn it. The fund topped out at $121.36 in February when the market still believed in rate cuts, then ground lower for three months as the rate-cut story died, bottoming at $94.86 on May 19. Since then it has bounced almost 10% as yields stabilized and builder confidence ticked up off the floor. It closed yesterday at $103.89, roughly flat on the year and still well below where it started the spring. A round trip that went nowhere, with a lot of motion in between.

That motion is the point. Our short vol signal lit up on XHB this week at both the 9-day and the 30-day horizons, in a name where realized volatility is sitting near the top of its two-year range and the options market is still pricing for the next leg down.

Let's have a look.

The Context

XHB is not a clean bet on six homebuilders. It is the whole housing-construction complex in one wrapper, equal-weighted across builders like Lennar, D.R. Horton, PulteGroup and Toll Brothers, building-products names like Builders FirstSource and Masco, and the home-retail giants Home Depot and Lowe's. No single stock dominates, so the fund moves on the thing they all share: the cost of money. When the thirty-year yield rises, the entire basket rerates at once.

The chart shows exactly that. From the February high at $121.36, XHB lost ground in near-straight lines into late March, recovered toward $109 in April as the bond market caught its breath, then rolled over again to the May 19 low at $94.86. The bounce since has been real but unfinished. We are 10% off the low and still 14% below the February high.

What drove it is no mystery. Every move in XHB this year has been a rates move with a homebuilder's name on it. The April rate shock, when the thirty-year auction went badly and the long end broke higher, is the same week realized volatility in XHB spiked above 32%. The May rally is the same week yields stopped climbing. The fund trades like a long-duration bond that happens to build houses.

So let’s look at realized volatility. Thirty-day realized vol sits at 26.97%, right at the 80th percentile of its two-year range. To put that in context, the two-year median is 23.59% and the 20th percentile is 21.94%. The fund has been living in the top quintile of its own volatility distribution for weeks.

But the trend underneath is down. Realized vol peaked near 32% in mid-April during the worst of the rate shock, cooled to around 25% by mid-May, and has only ticked back up to 27% because the May selloff and bounce kept the tape busy. The violent part is behind us. What is left is an elevated reading that is slowly stepping down.

Our forecast says more of the same. The 30-day realized-vol forecast points from roughly 27% toward 26.5%, the 21-day from 27.3% toward 25.8%, and the 7-day from 23.84% toward 23.48%. This is mild compression, not a collapse. The model is not telling us XHB goes quiet. It is telling us the worst of the realized-vol regime has likely passed.

So the picture is coherent. A rate-sensitive basket that took a real beating, has begun to heal, and is now carrying realized volatility that is high but fading. The question is whether the options market has noticed.

With that in mind, let's see how the options market has reacted and where the best opportunities lie.

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Since then, things calmed down: equities are back to all-time highs, the reality-TV show between Israel, Iran, and the US is still running, and while bonds have relaxed a bit, they remain attentive to developments around inflation and growth, of course.

So how did that trade go? Not a slam dunk, but not a loser either. One of those where you can be right on volatility and still be flat because you accept some directional risk. This is another tale of the variance game: last week in KWEB, some strong overnight movement punished a position that looked set to play out perfectly. This week is a little different, and it reopens the old debate of whether you should delta hedge or not. We will answer it in very practical terms: does the price of the strangle justify the delta hedge? How about the size? Of course, if you trade millions on our signals (and we thank you for the trust), these questions matter. But we often encourage people to keep it small precisely for that: paying more in commissions and taking on the operational risk is not worth the effort over a structure costing 75 cents per contract. It really is not.

Secondly, the goal of trading is not to be right but to extract enough money through that variance game that your expectancy stays positive over time. And at this game, a tiny win… is still a win.

Let’s have a look.

The trade

Two weeks ago we were highlighting the opportunity to short volatility in TLT through the 81.5/86 strangle in the June 18 expiry. At the time, we were justifying the position by looking at the probability — roughly 68% — that the implied volatility baked into the options market would overstate the subsequent realized volatility.

We were also pointing to implied volatility having some good odds to go down over the period of the trade while realized could go up. However, the 2.9 points of variance risk premium were in theory enough to get us into the trade. In the end, realized volatility did go up, from below 9 to just above 9, while implied volatility came down quite a bit, settling below 10 over the last few days and offering, once again… a negative VRP.

With such a crush in implied volatility, you would expect vega to have helped our position quite a bit. However, as mentioned in the introduction, the bigger problem came from direction: when we entered the trade, the underlying was trading around 83.5; it closed yesterday above 85.5, after challenging the 86 strike for a few days.

That was indeed quite the move up and without delta hedging once again, the kind of trend that is hard to recover from. Could you have done something about it that goes beyond delta hedging and taking into consideration the cards that we were dealt with at the time? You could. In the Signal Du Jour, we were pointing at how the probability to see the skew flatten over the next few days was high (93% at the time of the article) and indeed the puts looked expensive. It is always easier in hindsight, but tilting the position to make it slightly delta-positive, or simply overweighting the put side, would have turned a pretty much flat trade into a winning one.

One last comment: although this trade was not as profitable as what we were hoping at first, with enough edge baked in, the premium is often your first line of defense against an adverse move. Hence the importance of being able to predict whether implied volatility will exceed the subsequent realized volatility.

Let’s now look at the analysis Greek by Greek.

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The Greek PnL Attribution

Looking at the attribution, this trade tells the story of a volatility call that was largely right and a directional bill that ate most of the reward. Vega and theta both did their job; delta and gamma quietly handed the proceeds back. What is left at the end is a few dollars of profit — a win on the scoreboard, even if it never quite felt like one.

Theta was the steady earner, accruing to roughly +$33 over the two weeks — the rent you collect for being short options while nothing dramatic happens. Vega added another +$10 as implied volatility crushed from the low teens back below 10, with charm and vanna chipping in a few dollars more. Against that +$48 of gains, though, delta gave back nearly −$29 and gamma another −$12.

You can read the toll straight off the equity curve. The position climbed to about +$16 by May 27th, then surrendered two-thirds of it in a single session once the underlying started pressing the 86 strike, before grinding back to settle a hair under +$7. Enough premium to stay green, not enough to keep what direction kept taking away.

The daily view shows exactly where it slipped. May 28th is the −$10 session that did the damage, almost entirely delta and gamma as TLT pushed up toward the 86 call. June 1st was the one day direction paid us, delta alone adding about +$24 — possibly the start-of-month reallocation into bonds — though vega clawed most of it back as implied volatility popped on the session. Theta, for its part, keeps printing its small positive bar almost every day: the one Greek you can count on when the rest of the book is fighting the tape.

The only question left to answer now is should we roll or not? Although, given what the attribution just showed us, the answer should be fairly obvious.

Let’s have a look.

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Why is that? Because for the first time since the back-and-forth, almost public negotiation between Iran and the US, Iran confirmed on Wednesday that a deal was in the making, a material step in the right direction after months of open trolling of the US administration, claiming at times that President Trump was talking to himself.

The deal of course includes a reopening of the Strait of Hormuz, and, more surprisingly, a $300 billion fund invested worldwide for the reconstruction of Iran. We won’t comment on who won and who lost in that deal; that is far beyond our pay grade. We will just point out that, despite the market reaction, many are still convinced we are not out of the woods.

And why should we blame them? It has been going on like this for months, so why not an extra few months? First of all, because this is the first time since the beginning of the war that oil closed meaningfully down two weeks in a row: -5% last week, and now -8%. Once again, the market is a formidable machine at aggregating information. It is slightly imperfect, yes, but not meaningfully enough to say that, on average, an event priced at 10% was actually a 25%. And if risk perception is going down — whoever the next social media Cassandra may be — the market firmly disagrees right now.

And there have been many little signs like this, have you noticed? Let’s start with the obvious one - VIX on the 15 handle. This is genuinely the lowest level observed since early January, where a surprise attack on Venezuela was in fact just the early sign of what the rest of Q1 would look like. Is VIX too low? Once again, that may be your opinion, but as it stands, it is still materially above realized volatility.

Five points of VRP when the jump risk in equities gets meaningfully lower (realized volatility flirting with 10) is a genuinely good and much more stable condition for harvesting than the quite stressful weeks we had at the end of March — which feels like a lifetime ago now.
Yet we’ve been yapping about VRP for weeks now, so an astute reader could just say: okay Ksander, is that all you got? No, we have more. Once again, we don’t know if you’ve noticed, but VVIX is materially below its long-term average observed over the last 12 months. In fact, VVIX is so low that it is digging in the lowest percentiles observed since Liberation Day.

VVIX, or the implied volatility contained in VIX options, tells you the market’s expectations for VIX movement over the next 30 days. Last week it closed at 90, which was already the lowest level observed over the last 12 months and also happens to be its long-term average. Now it is at 85, one of the lowest readings recorded over the last year.

For many, this will be yet another sign that the market is completely dumb, out of whack, manipulated — whichever qualifier you may want to use. But it really is not. First of all, because a reading of 85 in VVIX, in the grand scheme of things, is really not that abnormal.

So essentially, in a matter of just a few weeks, the marketplace decided to stop buying these arguably most expensive insurance contracts. That points in one direction: risk perception is shifting. And that may genuinely be for good reasons.

With the Iranian war “out of the way,” the immediate catalysts for markets going down are off the menu. You would need something genuinely new and unexpected to rattle the markets. In other words, nothing in the current chatter of the day is representative anymore: it is all priced in.

And with summer now just a few weeks away, one has to squint really hard to find a reason why we would exit this quiet regime any time soon. The first FOMC under Warsh in mid-June? Likely a market mover, but we will have to wait and see if it turns out to be a true disruptor. How about inflation, the AI bubble, etc.? VIX 15 tells you everything you need to know: they may be an issue eventually, but not in the next 30 days. Lastly, we don’t know if you’ve noticed, but the market is clearly gearing up for some astronomical IPOs to land soonish.

Human beings are a paradox: when things are quiet we want movement, and when there is movement we want quiet. We forget the bad of one regime and fantasize about something new, something different. Be careful what you wish for. We don’t mind calm and boring — in fact, we crave it... as long as the market keeps baking in a healthy Trump Risk Premium. And while we won’t lose any sleep over a VVIX at 85, we will monitor closely to see whether these 4 to 7 points of VRP — observed consistently for more than a year in US equities — will erode, and with them, some of the fantastic sources of edge we’ve had at our disposal.

In other news

The biggest story of the week, by a wide margin, was the leak of the draft US–Iran agreement and the rather eye-watering price tag attached to it. According to The New York Times via multiple wires, the proposal floats a $300 billion “international investment fund” to rebuild Iran, paired with a 60-day ceasefire, a commitment to keep the Strait of Hormuz unrestricted, and even a Lebanon clause aimed at calming Hezbollah. The architects, reportedly Steve Witkoff and Jared Kushner, even floated joint ventures between US energy majors and Tehran’s oil sector.

For context, $300 billion is roughly the GDP of Finland and a good chunk larger than the entire Marshall Plan in today’s dollars. Whether any of this lands intact is another question entirely — Trump has not signed, the two sides still disagree on who controls the strait, and Iran wants its $24 billion in frozen assets released up front. But the symbolic shift is real. For markets, the message is simple: the geopolitical apocalypse the VIX was pricing in March has, for now, been swapped for a deal — and an oil chart down 10% on the week.

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Thank you for staying with us until the end. As usual, here are two good reads from last week:

• Here is an extraordinary read about crypto market, edge and making big (big) money while you can. And even if that source of edge is now gone and impossible to extract, it should give you some ideas about where to look for places where you have asymmetry of information and not a lot of competitor. Spoiler alert: not in 0 dte.

• If you still do not know what a perp is, you still have a few weeks to catch up. Here is an article from the FT talking about their raise in popularity and why the convergence between tradeFi and defi may be closer than one was originally thinking.
  
  

That is it for us this week. We wish you an excellent NFP week, and as usual, happy trading.

Ksander

For today, we want to look at one of the corners of the market where calm is not the word that comes to mind.

Today we turn our attention to EWY, the iShares MSCI South Korea ETF, that has been having the year of its life. The KOSPI broke 7,000 earlier this month for the first time ever, the ETF is up roughly 88% year to date, and President Lee Jae-myung's campaign promise of KOSPI 5,000 now reads like a quaint understatement. Samsung Electronics, which is about 29% of the fund, reported a 756% jump in quarterly operating profit in April on the back of HBM memory chips going into Nvidia's Vera Rubin platform. SK Hynix, another 20% of the fund, is in the same boat.

Then, on May 12, a government official floated the idea of an AI "citizen dividend", a profit-grab on memory-chip gains for the benefit of taxpayers. EWY dropped 10% intraday, closed down more than 7%, and yet the ETF has already rallied back to new highs. Needless to say that the options market is all over the place.

Let's have a look.

The Context

EWY started April at $126.22. It closed Tuesday at $200.65. That is a 57% rally in less than two months, on top of an already historic year-to-date move, in a fund where two stocks make up nearly half the weight. The May 12 plunge is barely visible on the chart now, a $14 round trip that took five sessions to recover and push to new highs by May 26.

Samsung is shipping HBM4 to Nvidia at gross margins above 80%, contract DRAM prices are up 50% in a single quarter, and the company has effectively booked its memory capacity for the rest of the year. The surprising part is not the rally. It is that the move higher has been delivered in straight lines punctuated by single-day shocks and that pattern keeps realized volatility elevated.

Thirty-day realized volatility in EWY sits at 55.46%. To put that in context, the two-year median is 28.72% and the 80th percentile is 46.44%. The fund is in the top decile of its own historical vol distribution and has been for several weeks. By a comfortable margin.

Our forecast does not say the storm is over. The 30-day projection points to roughly 47.6%, a modest compression from current levels but still well above the historical median. The 21-day reads 50.8%, the 14-day 49.3%. The model is calling for elevated realized vol to persist, just not at the 55%+ prints we have been seeing.

Let’s be precise here before moving forward. The trade is not a bet that EWY stops moving and in fact, if you are not comfortable with the daily moves, but most importantly the sudden jumps inherent with a high volatility regime, you may want to pass that one.

Otherwise, the thesis is the same: it is a bet that EWY moves less than what the options market is currently charging for. Two very different propositions, and the distinction matters when you are sizing a position in a fund where one comment from Seoul can shave 10% off the close.

With that in mind, let's see how the options market has reacted and where the best opportunities lie.

Read more

And while technology was central to many discussions, the reaction from a stock perspective has been particularly muted, not to say completely uninterested. And ultimately, while this trade lost money (our first bad call in Q2), it will be crucial to understand if it was because our reading on volatility was wrong, or because the markets continued on their slippery trend and their lack of love for anything Chinese.

We obviously know the answer to that question and will not spoil it just yet. However, we take that as a reminder that one has to get comfortable with the variance game. Once a trade gets “tested”, the number one reaction from retail traders is to “defend” the trade and avoid the loss at any cost. We barely ever do so. Some trades will make money, some trades will lose money. It is important to manage the size of your position so that no position is big enough that an occasional loser will wipe out the gains of many good ones. Obviously we will not say anything against anyone trying to delta hedge a position that has accumulated too much direction. But think about the opportunity cost: there are new opportunities every single day! Why would one try to repair or defend something that will most likely fall in the “bad trade” category, when one could just close it and focus on the next trade?
Let’s have a look.

The trade

Two weeks ago we were highlighting the possibility to short the 29/33 strangle in KWEB expiring on May 29th. At the time, Chinese equities saw their implied volatility rising as uncertainty around President Trump's state visit to China was building up. And it was building up so much that our signals were flashing very strongly.

At the time, we saw an 82% probability that implied volatility sold in the region of 9 dte would exceed the subsequent realized volatility. We were also pretty much convinced that implied volatility would go down, while realized volatility would potentially go up.

These predictions gauge direction but not magnitude, and therefore a 21-point variance risk premium between implied and realized volatility felt safe enough to get into that trade without thinking too much.

But occasionally what looks like an absolute slam dunk… will miserably fail. And the worst part? Not even because the plan and the forecast were wrong.

Indeed, as soon as the tone between Trump and Xi was understood to be much more cordial than what many had anticipated, implied volatility collapsed and went from north of 45% before the trade to below 30% a few days later. Surely, such a volatility crush would have helped our position.

But the problem is in the magnitude of realized volatility: it went up, and not by a small amount, almost doubling in just a few days before stabilizing around 35%. Now, 35% is still lower than what we sold, and normally this should have left us in a good position to still make money on the trade. But a big acceleration in realized volatility like this often comes with a strong trend, and more often than not, to the downside. And this time was no different.

First of all, in typical Chinese equity style, you can see that a good chunk of the movement is realized overnight, which ironically makes delta hedging such short-dated options both detrimental and unrealistic in practice. The real killer here is gamma: those overnight jumps showed up in roughly half of the nights when we had this trade on. And with such a trend, not only did our strikes get blown away, but the underlying never really gave any indication that it could recover from there.

We insist: these happen and one needs to get comfortable with them. When you have an edge, they do not happen regularly enough to be more than mildly annoying. But there is very little you can do: when you underwrite insurance, once in a while you will have to pay the claim, and there is no amount of “defending” that will get you out of your obligations.

Let’s now have a look at the PnL attribution for each of the Greeks to confirm our analysis.

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The Greek PnL Attribution

Looking at the attribution, this trade tells a clean and somewhat unforgiving story. It was less a failure of our volatility forecasting than the consequence of a one-way move we could not outrun. Vega paid us, theta accrued, but delta — really gamma in disguise once you are short overnight gappers like KWEB — took it all back and then some.

Vega did its job early. As Trump and Xi traded warm signals, front-end implied volatility crushed from 45% down to the low 30s, generating roughly +$20 of cumulative vega level PnL within two sessions. Theta also performed as designed, accruing quietly to +$35 by exit — the rent collection that shows up regardless of what the headlines do.

The problem is that delta dwarfed both. At its trough on May 22nd, cumulative delta PnL hit nearly −$180, recovering only partway to −$100 at exit. There is no amount of theta or vega that offsets that in a two-week window, short of a perfectly-sized 2–3% rebound which never came.

The daily view makes the path even more apparent. The two killer sessions are May 21st (−$47) and May 22nd (−$65), where the delta bars dwarf everything else on the chart. Both moves happened overnight, with investors dumping shares into the broader Hang Seng tech rout that hit Hong Kong in mid-May. Notice also how theta stops paying meaningfully once the strikes are breached: the options are now either deep in or deep out of the money, with very little time value left to decay on a day-to-day basis.

With all that in mind, let's see if we should roll the position and try to get back in.

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We won’t lie: we didn’t indulge as we are having a bit of indigestion.

It was not particularly fun to hear missiles above our heads a few months back, it really isn’t fun (anymore) to see the entire planet speculate on what President Trump may or may not do, when we all know… that he ends up eating tacos on Tuesdays. And we are in luck: Monday the markets are closed for Memorial day and will only reopen... on Tuesday!

More seriously, the mood this week in the market was very contained, hence why we found ourselves flabbergasted by the frenzy of the last 48 hours: stocks went up about 1%, the bonds relaxed a bit, and the entire commodities complex closed down. The VIX closed in 16 territory, telling you … all you needed to know.

Now of course, if an attack actually happens, we will look like fools, but .. we’ll happily take that bet and see if we need to wear a clown mask on our note next Sunday.

Indigestion doesn’t mean bad mood though. What is there to hate? This spectacle is a bit tiring but the exact signal we were expecting to open the VRP harvesting season. On one hand, many “analysts” and social media stars are already calling the VIX too low for all the risks currently in the marketplace. On the other, we have other ex-fund-manager-but-still stars blaming the lack of realized volatility to explain their demise after explaining to the whole world that VRP was virtually inexistant…

So where does that leave us?

Pretty much at the exact same place we were for most of last year, and putting aside a few episodes in Q4 2025 and most of Q1 2026, in a place where you will have to botch your trades like a pro to go wrong selling options in SPY. Now obviously where you do so still matters; the VRP is particularly negative in the front and selling options (particulalry on the call side…) may end up punishing you: stocks go up more often than not, and we are pretty certain that Donald Trump would rather see them high than low.

Back to the VRP: anything from 2 weeks out to 3 months out is fairly game on… and particularly on the put side, where the Trump Risk Premium is still particularly strong. Once again, your customers are here: those that are convinced something terrible will happen eventually and insensitive to the price of that eventuality.

Markets and trading options do not have to be complicated: yes VIX is low, but realized volatility is even lower. Yet all over social media, you will see theses thesis trying really hard to convince you that the next apocalypse is about to strike, whether it be Iran, whether it be AI, or whether it be the inflationary pressure due to the oil spike.

Let us be precise once again: we are not saying none of that is true and will not (potentially happen). In fact, you may be wise to hedge the longer term risk. But what we are saying is … VIX 16 tells you everything you need to know. The collective doesn’t believe any of these theses matters that much right now for the next 30 days onward. You can obviously speculate that the market is wrong and buy options. But we will put back the chart from last week that triggered a lot of reactions and questions in our DMs.

Yes, over the last year, had you sold every ATM straddle in SPY and held them for two weeks, you would have had a great run. Market participants are burnt by Liberation Day and all the geopolitical events of the last 12 months and ready to overpay, just in case.

And we argue that run is not ready to stop yet because the conditions are extremely similar: quiet markets, and participants binging on junk news and social media posts from the master of deception, DJT.

We don’t know what will happen next, but all we know is that as long as realized volatility stays fairly contained, these options are overpriced. And for now, it’s hard to see it jump meaningfully back up.

Could it go back above 15 over the next 30 days? Absolutely. But what are the catalysts, considering that the Iranian situation is not a surprise anymore, but a given?

Markets react poorly to uncertainty but are fairly comfortable with the cynical stance of a status quo (Ukraine has been going on for 4 years, and it’s been roughly 3 years and 10 months that the markets haven’t reacted to what happens there anymore.)

We would go one step further: the market is a formidable machine rooted in the wisdom of the crowd, and whatever view one may hold, it is already priced in by the millions of market participants all over the world. And we will go one step further; at VIX 16, the bulk of market participants are not buying insurance because they discount the current risk as not worth hedging for the next 30 days. You can disagree with that, but do so at your own risk (expense).

Don’t be disappointed: inevitably, spikes and stress will come back to the table. However pay close attention to the chart above: how many times do you see orange or red dots? They feel visually impressive, but they represent less than 20% of the dots on the chart while more than 50% of the time is spent in calm or positive VRP territory.

At the close on Friday we were in a calmer regime, characterized by low realized volatility and low volatility of volatility. And you know what? It’s end of May with the beginning of the very nice summer days: go enjoy them! Get off social media and geopolitics! Go back to the pubs and don’t check your twitter feed: the beers are on these SPY puts you are selling.

In other news

NVDA stunned the market again with another blockbuster report and the market just shrugged it off. The AI bubble is about to explode you think? We don’t know, but you could also argue that the market doesn’t react anymore because it has accepted the transformation AI is bringing at the moment, and it is only normal for NVIDIA to post astronomical results when the entire business landscape is gearing itself for a world with even better models.

And if there is one person that is looking really far ahead when it comes to the future and AI, one cannot deny that it is Elon Musk. We learnt through the SpaceX paperwork for its upcoming IPO about the grand vision for a company that could mine asteroids, transport people to Mars and harness solar energy to power “truth-seeking artificial intelligence”. Tout un programe.

We also learnt that before the first iteration of its extraterrestrial data centers, we got confirmation that Musk has signed a $15 billion per year deal to rent the Colossus data center to Anthropic. The idea of data center in space obviously sounds insane, but so did Starlink 15 years ago, now an absolute cash cow bringing $11 billion in revenue a year to the company.

Yet, the company is still losing money right now and the price tag of $1.75 trillion is roughly 94x the current revenue. A bit pricey? Sure, but do you think our usage of data and the internet is going to go up twofold, fivefold, tenfold, or a hundredfold from here in 10 years?

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Thank you for staying with us until the end, as usual here are two great reads from last week:

• The Terminalist published a fascinating deep dive into why financial data distributors — Bloomberg, FactSet, Refinitiv — are sitting on eroding moats. The thesis: AI-native challengers and regulatory mandates are commoditizing the very data normalization and concordance work that made terminals indispensable. For anyone selling options on these names or thinking about the long-term dispersion trade between exchanges and their data middlemen, this is required reading. Spoiler: the author argues a second de-rating hasn’t been priced in yet. Read it here.

• One of the most notorious concepts in crypto trading is the funding rate: you pay for leverage or .. you can be paid to provide liquidity. And it turns out that rate is floating and sometimes reaches astronomical values. Here is a great article explaining some of the dynamics and why 400% to long oil was (somewhat?) justified (only by the degenerates, of course.)

That is it for us. We wish you a wonderful week ahead and remember: you do not have to browse your social media feed, but selling these puts may be a good idea.

Ksander

The catalyst is the same one that has dominated 2026: oil. The Iran war continues to keep the Strait of Hormuz effectively closed, energy prices are up nearly 80% year to date, and headline PCE has climbed to 3.5%. The FOMC is split 8-4, its deepest internal disagreement in over 30 years, and the incoming Fed Chair Kevin Warsh is an unknown quantity whose first rate decision has markets pricing in a coin flip between hold and hike. And needless to say that bond traders are not waiting to find out.

TLT, the 20-year Treasury bond ETF, closed at $83.77 yesterday after dropping nearly 2.3% over the past ten days. Year to date it is down over 3.4%, and it touched a 52-week low of $82.77 last week. This is a market under genuine stress, and options are priced accordingly.

Let's have a look.

The Context

TLT has been in a slow grind lower all year. The ETF started January near $86, briefly rallied toward $90 in early February on hopes that the rate-cutting cycle still had legs, then reversed sharply as the Iran conflict escalated and energy prices reset the inflation outlook. From $88, TLT slid to $83, a drawdown that has accelerated in the past two weeks as the long end sold off on a weak 30-year auction and renewed fears of fiscal deterioration.

Realized volatility tells a more nuanced story. Thirty-day realized vol in TLT sits at 9.89%, which is right at the 50th percentile of its two-year range (the median is 9.63%). To put that in context, the 20th percentile is 8.61% and the 80th percentile is 11.47%. We are squarely in the middle. The bond market has been selling off, but it has been doing so in an orderly fashion, without the kind of daily swings that would push realized vol into the upper quartile.

Nine-day realized vol is a different picture. At 12.79%, it sits above the 80th percentile (11.75%), reflecting the sharper moves of the past week and a half. But this is trailing data, measuring what has already happened. Our forecast expects 7-day realized vol to compress from 13.38% toward 11.47%, and the 30-day forecast projects expansion from 9.73% toward roughly 14%. That 30-day expansion is worth noting: the model sees realized vol drifting higher over the coming month, not lower. We are not betting that the bond market calms down entirely.

With that in mind, let's see how the options market has reacted and where the best opportunities lie.

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Another very clean expression of the variance risk premium: worried investors became insensitive buyers, as they prefer to be safe rather than sorry. Is it dangerous to take the other side? Of course it is, and Q1 is a good reminder of that: between natural gas, silver and oil, you are only one black swan away from having to pay the claim on the exact insurance contract you sold.

Yet, it can still be a very profitable business and for this to happen, you need to have an edge at detecting real opportunities and then play the variance game: accept the occasional and unavoidable painful black swans in exchange for long spells of quiet and predictable gains. Our edge is in our ability to forecast if the subsequent realized volatility is likely to exceed the implied volatility you can sell today in the market. And that is exactly the story of this trade.

Let’s have a look.

The trade

Two weeks ago, we were presenting the 42/51 strangle in IBIT June 5th as most likely overpriced considering the amount of risk in the market at that time. Sure, IBIT has gone up almost 9%, and realized volatility had caught up to the level of implied volatility measured in the option market. Yet over the last few days, this gap was widening slowly but surely and as it stood at the time, we had pretty solid odds on our side:

A 65% chance of seeing the subsequent realized volatility over the next 30 days be below the implied volatility you would sell today. And while we thought at the time that implied volatility could go up, we were pretty convinced to see realized volatility going down (87%), which made the position easier to carry.

In the end, things happened almost as we expected them to.

Implied volatility came down at first from 42 to 40 before picking up slightly again, while realized volatility cratered from 39 to 33. We would expect therefore to see vega play a small positive role in the position, but really, the bulk of the job should be done by theta, as each passing day with realized volatility going down meant the price of the insurance needed to be discounted. Yet, even if realized volatility stayed low, you could still be bothered by an actual trend in the underlying. In theory, you could avoid that by delta hedging, but this is something we do not do at Sharpe Two: we accept the potential directional risk and make a bet on volatility, yes, but muddied by a potential strong movement in the underlying. This wasn’t the case this time.

When we entered the trade, IBIT was trading roughly at 46, and while it went down to around 43 early this week as bond markets worldwide are sending some jitters down the spines of investors, it never really challenged the boundaries of our strangle.

In such circumstances, this is another profitable trade where the ability to predict the dynamics in the option market versus the likelihood of seeing the underlying go through wild swings served us well.

In the end, about a week into the trade, you had an opportunity to take the trade off at our usual profit target. Let’s now have a look at the PnL attribution by Greeks.

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The Greek PnL Attribution

Looking at the attribution, this is a textbook variance risk premium harvest. Theta did the heavy lifting, delta stayed out of the way for most of the trade, and the real drama only arrived in the final sessions.

Theta accumulated steadily from day one, reaching roughly +$23 by May 11th when the trade crossed the profit target and building to approximately +$58 by May 18th. This is rent collection in its purest form: realized volatility cratered from 39 to 33 while implied stayed above 40, and the insurance premium decayed in our favor with each passing day.

Delta was barely a factor for the first ten days. IBIT drifted between $43 and $46 without real conviction, and cumulative delta contribution hovered near zero. That changed on May 18th when the global bond selloff spilled into crypto and delta swung to roughly −$15 in a single session, deepening to −$30 by May 19th.

The interesting bit is vega skew. Negligible for most of the trade, it turned meaningfully positive on May 18th and 19th, contributing roughly +$16 as investors sold their calls during the risk-off move. That call-side selling effectively repositioned our exposure toward the put side, cushioning the blow from the increase in implied volatility level.

The daily chart isolates the critical sessions. May 18th: +$15 of theta earned, yet the total PnL dropped by roughly −$25 as delta overwhelmed everything else. That is the day that reminds you why the profit target exists. Theta was real, vega skew was a timely friend, but when the underlying moves with this kind of force, short premium without a hedge becomes a directional bet whether you like it or not.

Now that we have seen all of this, let’s spend some time on the only question left to answer - should we stick in that position, or potentially roll it further? Let’s have a look.

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The VIX closed on the 18 handle, not quite signaling a shift in investors’ mood, but a clear sign that the marketplace isn’t willing just yet to go through the second part of the year in YOLO mode with no insurance contracts should turbulence come back in full force. But which turbulence, you may ask? Didn’t the summit between China and the US go really well, with both Xi and Trump remarkably cordial with one another, showing respect and maybe even, to quote the President, friendship? Isn’t a world where China and the US are partners and a cold peace is enforced more stable and pro-business?

Yes. But that is not the whole story. The main one this week is less about what was said at the summit than all the lingering problems for the US economy that are starting to accumulate and, until proven otherwise, have the potential to come bite hard in the second part of the year. And the main reason why US equities had a hard time holding on to their gains is less about China not buying US chips anymore than the 10-year US yield climbing and climbing and climbing again.

And why is that? Well, because of a potential self-inflicted wound on the oil side, with the barrel of oil still well above $100 and the promise that inflation will continue to rise, while at the same time fiscal spending is not being tamed. A dangerous cocktail that can only lead to a hangover, and we are certain that Kevin Warsh, who became officially the new Fed Chair on Wednesday as Jay Powell was leaving the building, already has a rampant headache.

Spooky spooky? Perfect. It means your customers are here, willing to buy insurance contracts, and your goal, as usual, is to assess the risk, if possible from a quantitative standpoint — unless of course, you have an edge on the macro side.

The variance risk premium, or the difference between implied and realized volatility, is now back in full force in US equities with more than 8 points at the close on Friday for the Jun 18th contract. As we were pointing out a few weeks ago, 8 points when realized volatility is at 10 is a much safer place to start than 18. Volatility spikes yes and we could go from 10 to 18 in no time, but volatility clusters, and that is equally true in the middle of a war with Iran as in a regime where that war is somewhat being resolved, hopefully with the help of China as Xi opened the door to it.

“Yes but can we reliably trade the VRP?” is a question we hear all the time, especially as some X-famous (ex-famous for some, more of that in a minute) fund managers have popularized the view that the VRP has disappeared and the only thing that matters is gamma flow combined with … macro. So we have added above one of our favorite charts as evidence: here is the performance of selling 28-DTE at-the-money straddles in SPY since liberation day last year. Obviously this doesn’t mean things will continue like this forever. However, as long as realized volatility is durably below implied, the edge persists. Speaking of realized volatility, despite picking up on Friday it has been extremely tame over the last week.

We did realize 10.5% over the last 30 days and anticipate things to climb back up to potentially 12, but the catalysts do not seem there just yet to see realized volatility over the subsequent weeks seriously challenge what is implied in the option market right now. Sure, NVDA earnings on Wednesday and the next FOMC in June could move markets quite a bit, especially if the market keeps asking Chairman Warsh the tough questions straight out of the gate. Yet this is not transpiring in the volatility surface.

So far there isn’t anything particularly exciting in the equity term structure; most of the options demand is concentrated in the 20-delta put from one to three months out, as you would expect in these circumstances. But what about the other asset classes that have dominated the news this week?

In TLT, implied volatility added almost three points on Friday, going from 9.81 to 12.57. And while we are not in a stress regime yet, nor should we anticipate one, this is the kind of jump in bonds that should be seen as an indication of what is likely to keep the market up at night over the next few months — and therefore, what you should be paying attention to. Hopefully everything is resolved post-FOMC and we lose two points, but we suspect that pattern will repeat itself on a regular basis over the months leading up to Warsh’s very first Jackson Hole.

So what to do about it? Implied volatility in equities is not too expensive and you would be wise to buy some wings in the later months of this year. Yes, they cost money, but they also provide immediate margin relief and add the necessary protection to traverse market turbulence much more comfortably. The question is: should you buy some in the bond complex? We communicated a few times, especially to our Discord group, that we were quietly accumulating bond insurance for the latter part of the year and early next. Once again, better safe than sorry. And while doing so, we still make sure to harvest the variance premium in short-dated options. It’s been profitable, and until a new catalyst appears, one should take advantage of the opportunity.

In other news

Nassim Taleb has popularized the idea of being fooled by randomness — that previous success could have been pure luck and not necessarily skill — and the concept of black swans — that true randomness cannot be computed and can strike at any moment in time and space — over the last 20 years, and yet the industry is still full of countless examples not living by these fairly straightforward principles. For instance, we learnt this week that QVR Advisors and Benn Eifert suffered a loss of 30% in Q1 alone this year, leading to the fund’s closure.

Let’s start with the obvious: Benn’s effort to educate the options community over the years has been nothing less than outstanding, and unfortunately only matched by how full of himself and condescending he has been with many on social media. We do not deny his ability and recognize his knowledge far surpasses ours, yet this is a stark reminder that you do not need to be the smartest in the room to make money trading, and/or that even the smartest minds in the game can still be fooled… by the random nature of the game.

Here is our argument: how is a volatility fund supposed to blow up during a bout… of volatility? Mind you, not even the craziest one? It’s like saying that a long-only fund suffered terrible losses during… a rally? Something doesn’t add up, and we get it: we haven’t managed $1bn+ in capital and have no idea what it’s like to rub shoulders with the big boiis. But still, some further explanations would be great, although Wall Street has never been great at post-mortem analysis and the very short statement given by Eifert only exemplifies our point. To conclude, we will just point to a video of him and another famous X fund manager talking about options and VRP. And once again, we get it, we are tiny fish who are not playing the game at the highest level, yet… care to remind us of the performance of selling at-the-money straddles in SPY over the last 12 months? How does one explain it if it’s not because options are structurally expensive versus the risk they hedge against, or put it another way: the proof of the variance risk premium…?

A side note: we have reached out to Benn to ask for more explanations. We were gloriously ignored.

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Thank you for staying with us until the end. As usual, here are two great reads from last week.

• An excellent deep-dive into why most of the code we build around AI agents today is temporary scaffolding — and why that’s actually fine. If you’re building anything with language models, this piece will make you rethink what’s worth investing in. Read it here.

• An excellent and alarming article about what has been deemed the greatest threat to civilization: not climate change although it is quite high, but the falling of birth rates, everywhere, all at once. And the main culprit…? Technology. Read it here.

That is it for us. We wish you a wonderful NVDA + FOMC week ahead, and as usual, happy trading.

Ksander

The picture is totally different for the options market in Chinese internet stocks. KWEB, the KraneShares CSI China Internet ETF, is down over 14% year to date, weighed down by the Iran war spillover and the lingering US-China tech tensions that trace back through last year's Liberation Day tariffs and the regulatory crackdowns before that. The ETF closed at $30.59 yesterday, its best session in weeks after grinding around $29 for most of May. Whatever your view is, options are pretty expensive at the moment and that seems like perfect timing to harvest the Chinese risk premium.

Let's have a look.

The Context

KWEB has been drifting lower all year. The ETF peaked near $43 in late 2025, sold off through the first quarter as the Iran conflict and broader geopolitical uncertainty weighed on emerging markets, and spent most of May grinding around $29 before yesterday's 5% rally to $30.59. A 30% drawdown from the highs, partially recovered, but the options market is still charging for the full ride.

A 30% drawdown from the highs, partially recovered, is rarely done without any tremors on the realized volatility side. Nine-day realized vol in KWEB sits at 24.41%, which is just below the 50th percentile of its two-year range (25.01%). At 30 days, realized vol is at 22.22%, actually below the 20th percentile (22.58%). To put that in context, KWEB is one of the more volatile ETFs on our platform, and right now it is realizing less volatility than 80% of its recent history at the 30-day window. The wild swings from March and early April, when realized vol was running above 30%, have completely rolled out of the lookback window. That is why we are focused on the 9-day horizon today: the summit window is short, and that is where the insurance premium has concentrated.

Our forecast expects 7-day realized vol to compress toward 20.54%, and the 30-day forecast settles around 22.75%. Unless the summit in Beijing produces a genuine negative shock (a breakdown in talks, a new round of tariffs, a Taiwan provocation), the base case is continued calm.

With that in mind, let's see how the options market has reacted and where the best opportunities lie.

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Let’s get straight to the point: if you followed that advice, this is yet another positive trade that you landed with us. But if you succumbed to the sirens of theta, and tried to stay, just one more day, just one more night, you may right now find yourself in a particularly spicy pickle, trying to find ways to “salvage the trade” or “wheel your way out of it”. First of all, we won’t spare you the ‘we told you so’: trading theta is not a strategy and despite the plethora of evidence, the fact that so many retail traders still fall into that trap is disheartening. But we won’t even entertain the idea of defense mechanisms either: this idea that you can repair a trade that didn’t go your way by some sort of magical trick where you keep selling options and hoping that things come back your way.

This doesn’t work. Unless, of course, variance does you a favor and SMH goes back down. But essentially you are short the stock, and rolling the call side, picking up pennies to keep the right to still be short does not make it a volatility trade.

Every time we’ve explained why this doesn’t work on different social networks, we’ve been met with fierce resistance and every time we ended the conversation with the same argument, particularly à propos as we talk about SMH today: we heard that some people are still selling calls on NVDA at $130 from February 2023…

So what to do next? Cut your losses, and next time, do not trade theta.

The trade

Two weeks ago, we were pointing to an opportunity to short the 450/535 strangle expiring on May 15th in SMH. At the time, the demand for options, particularly in the short term, was higher than usual, as a result of the earnings season and the breadth of opinions on where the tech sector should go versus how the AI narrative was actually playing out, in particular for the semiconductor sector. Our signals were very green: the likelihood to see implied volatility sold at around 9 DTE and not 30 DTE, important distinction versus most of the article we publish here, exceed the subsequent realized volatility (so over the next 9 days and not 30 days) was about 66%.

We also predicted that implied volatility was more likely to go down from there (at the time 51%) and that there was some chance to see realized volatility go up from there. Yet, almost 8 points of VRP was a comfortable cushion to consider the trade, subject again, that one didn’t overstay his welcome. And things, in the end, did happen roughly as we were expecting them to:

Implied volatility came down from 51% to 37% in a few days as the market unloaded the bulk of its options. And while realized volatility didn’t explode, it stayed pretty much neutral for a few days before collapsing at the back of the week after, before climbing again. Does this volatility seem jumpier? Indeed, it is. That is one of the features of measuring volatility over a much shorter timeframe than the usual 30 days, and not just an artefact of SMH in the middle of earnings.

And the path dependency problems are often much worse in short-dated options than longer ones: to build some quick intuition around it, you do not have that much time left for the variance to make a move that will cancel the path hurting your strangle’s strikes all while staying below the implied you sold. Needless to say that the move in SMH past earnings was unforgiving in many regards and had you been tempted to squeeze more theta, you may have just ended up with … nothing and even a big loss.

SMH was hovering around 500 when we entered the trade, behaved for a week delta-wise, before starting a trend for the ages that left it flirting with 580: almost 20% in less than 2 weeks. After Q1, you should be immune to these sorts of moves: they happen, more often than not, but when you have an edge, not enough time to truly hurt your portfolio, should you size accordingly, obviously.

In the end, you could have taken the 25% out of the trade fairly early as the market dealt with earnings fairly in line with expectations, and avoided yourself a ton of trouble after.

With that said, let’s go have a look at the Greek PnL attribution on this trade.

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The Greek PnL Attribution

Looking at the attribution, this trade is a study in time discipline. For the first week, the Greeks lined up as designed. After that, delta took over and never looked back.

As implied volatility compressed from 51% in the days following earnings, vega contributed a modest tailwind while theta accumulated steadily. By May 3rd, cumulative theta had reached approximately +$350 and delta was contained near zero. This was the window. The dust was settling, the variance risk premium was being harvested, and the 25% profit target was within reach.

Then the trend started. Delta’s cumulative contribution swung from zero to −$1,500 by May 6th, −$2,500 by May 8th, and −$3,500 by May 11th. Theta kept accruing to roughly +$1,000 over the full period — but +$1,000 of theta against −$3,500 of delta is not a trade you can grind your way out of.

The daily view tells you everything about why hoping for delta to come back is not a strategy. Look at May 7th: a +$600 relief day, driven almost entirely by a delta snap-back as SMH pulled from $540 to $525. That is the session where a trader holding too long thinks “the market is coming back my way.” It did not. May 8th erased that recovery and added −$1,700 on top. We are delta neutral for a reason — direction is a coin flip, and the daily attribution is a stark reminder.

The mechanical lesson: theta was real, vega was a mild tailwind, and neither mattered once the underlying trended. When the subtitle says theta is a mirage, this is what we mean — it looks like income right up until a three-day delta move erases weeks of collected premium.

Now, the only remaining question is should we go back into this trade? NVDA earnings are due in a few weeks from now, implied volatility went up a little bit accross the board as the geopolitics got tensed again, so maybe options are expensive again? Let’s have a look.

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The S&P 500 added another 2.5%, carrying its year-to-date performance to roughly 8%, while the Nasdaq added no less than 5.5%, getting its tally up to 16%. As a reminder, both indices were flirting with down 10% on March 30. That is quite the rebound, and not to draw too many parallels, but very similar in style and intensity to the rally we observed in Q2 2025, once the standoff with another major geopolitical actor (China) de-escalated.

This time, officially at least, the de-escalation with Iran is not done yet. The week started with open fire in the Strait of Hormuz, missile alerts in Dubai, and the Iranian army reporting shooting at an American vessel carrying out its “humanitarian” mission to allow passage through the strait. Oil went up… and then went down, as reports of excellent progress on a 14-point proposal between Iran and the US came through. In March, this context would have certainly sent jitters through the different asset classes. But not in May — proof again, if we needed any, that in the grand scheme of things, macro is more often correlation than causation.

In any case, realized volatility has evaporated. And you would expect so: volatility in general is negatively correlated with returns, so needless to say that a +25% rally in six weeks could only happen with realized volatility leaving the building.

And boy, it did — from literally 19% through the month of March to barely 10% since the start of the rally. As if, once again, the entire marketplace, or at least the big hands, had decided that 2026 would start only in Q2, but before that, everybody would stay on the sidelines.

And if you are still worried about tensions reinitiating, you may be on the wrong side of the story; sure, we still see realized volatility over the next 30 days closer to 13 than where it sits right now, but that is nothing dramatic.

And yes, we didn’t close at VIX 16, but we did see it for quite a bit of time on Wednesday and Thursday — the handle we usually like to take as a reference for the absence of anything major on the horizon. Should you worry about VIX 17? Absolutely not. Of course it could spike back to 22 with the right catalyst, but what could that be in the next few weeks?

President Trump is due for a visit to China, but the public call for Iran to reopen the Strait of Hormuz for the good of the international community — coming during the visit of Iran’s top diplomat to Beijing ahead of that state visit — is as much of a capitulation from China as you will see on the matter.

The contango in the term structure is finally back to a healthy state for the first time since the beginning of 2026, and once again, unless a truly unexpected event occurs, the risks the financial press is speculating about — inflation, economic slowdown — are all stacked at the end of the year, until obviously proven otherwise. In that context, and once again, almost text book like 2025, you won’t see people totally getting rid of their insurance contracts, but just keeping the bare minimum to satisfy risk compliance, and with that, the variance risk premium slowly but surely keeps increasing throughout the entire term structure.

You now have almost 7 points at 30 days; it is back to a very healthy state, and prime harvesting season may be right about to start. That said, as we remind every now and then on this newsletter, playing volatility is nice — it is a great way to add diversification to your portfolio. But these five weeks are a great reminder to always be long, no matter the very smart views you may read online about stagflation, the lost decades of the ’80s, or the fact that this rally is almost textbook what happened pre-2001 crash.

Obviously going through a crash and its surplus of volatility sucks, and we certainly would have been happier with a slightly less stressful Q1. But you know what sucks even more? Being on the sidelines when the S&P 500 gives you a Sharpe of 10 and +20% as a reward for just staying invested and not trying to time things. We often get questions about how to be long vol; part of the answer is to make sure you own stocks. Period.

And if you insist on doing that with options, calls are still cheap in the grand scheme of things, which means that an (unhedged) risk reversal may be as effective as trying at all costs to harvest a volatility premium. Markets are fluid and dynamic; they require us to always do the same thing, each time a little differently.

In other news

Stocks are accelerating to the upside, led by the tech sector and in particular semiconductors, as the world slowly awakens to the fact that the AI revolution may be real after all, and that whoever owns compute can become a kingmaker. Let’s take Anthropic for instance; we learned that they hit a $30 billion revenue run rate — an 80-fold increase in a single quarter. These numbers are even more optimistic than the most cynical estimations from the AI skeptics, who tried to ridicule all the circular deals between the different actors. All of a sudden, the entire marketplace listens, and even Intel is back from hell. But let’s stay with Anthropic, who suffered quite the backlash these last two months despite teasing Mythos and releasing Opus 4.7. One of the reasons? Token scarcity, as users complained that credit limits went down — when in comparison, you had no limit with GPT 5.5. A problem that may have found a solution; this week Dario Amodei, the CEO of Anthropic, announced that the company had secured a deal with Musk and SpaceX to use spare capacity at one of its key data centers and … double credit limits to every Claude subscriber. As we wrote above, capacity owners may very well be kingmakers, and if you are short semis… you are short a company that pissed off its customer base because they couldn’t give more tokens — literally digital cocaine — and as a result had to scramble a deal with one of the most controversial figures in the kingdom to keep up with demand.

But sure, let’s keep fishing for these accounting frauds.

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Thank you for staying with us until the end, as usual, here are two great reads from last week.

• Insider trading on regulated markets is generally not a great idea, and lawyers from a major law firm got caught red-handed — yet another proof that the consequences may not be enough to deter those who have access to privileged information. What happens, then, when you open the door to… non-regulated or grey-regulated markets? Excellent piece of research about how insider trading spills into prediction markets around earnings announcements.

• Here is a fascinating piece of research from Anthropic’s interpretability team: they built a system that can translate what’s happening inside an AI model’s brain into plain English — no supervision, no labels. It caught a model secretly recognizing it was being tested, which is both impressive and slightly terrifying. Essential reading if you care about where AI safety is heading. Read the full paper.

That is it for us this week. As always, be patient, be selective, and happy trading.

Ksander

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A part from that, semiconductors are having a hell of a week. AMD gained 18% after guiding higher on AI chip demand, Supermicro added 24%, and the S&P 500 closed at yet another record above 7,300. The tech earnings cycle has been the catalyst, but the move is broader than just chips. Risk appetite is back across the board, and crypto is riding the wave.

Three weeks ago, we published a Signal du Jour on IBIT recommending a long volatility position. At the time, realized vol was running above 44% and options were priced below that. The variance risk premium was negative and the setup favored owning convexity.

That trade is done. IBIT has rallied roughly 9% since then, the macro backdrop has softened, and our model now flags IBIT on the other side. For the first time in months, the signal says sell.

Let's have a look.

The Context

IBIT traded at $42.56 when we published the April 16 piece. As of yesterday it closed at $46.28, and the recovery from the February lows near $36.50 has now stretched to roughly 27%. Bitcoin is trading near $80,000 and ETF flows have remained strong throughout the move.

The price is one thing. How it gets there is another. Three weeks ago, IBIT was posting daily swings large enough to keep 30-day realized vol well above 44%. That has changed. Thirty-day realized volatility now sits at 39.58%. To put that in context, the two-year median for 30-day realized vol in IBIT is 38.14%, and the 80th percentile is 48.09%. We were well into the upper quartile during the March stress. Now we are sitting right on the median.

What stands out is the short end. Nine-day realized vol has dropped to 30.31%, which is below the 20th percentile of its two-year range (30.73%). Bitcoin is having one of its quietest stretches in over a year. The daily swings that were delivering 4-5% moves in March have compressed to 1-2%.

Our forecast expects the compression to continue. The model projects 30-day realized vol to come down from current levels toward 32.3%, and the 7-day forecast points to a drop from 32.2% toward 30.9%. The large daily swings from March and April are rolling out of the lookback window. Unless something breaks the current momentum, realized vol has further to fall. But it doesn’t necessarily mean that implied volatility will follow through at the same pace…

With that in mind, let's see how the options market has reacted and where the best opportunities lie.

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We are not saying there is no edge in trading directionally: it is well documented that momentum strategies, combined, tend to reward the patient and vol adjusted investor. It is also very well documented that occasional spike in biotech and other assets alike (MSOS being one of them) tend to reach some really high highs before mean reverting. And yes, that is textbook what happened this time again.

Hence the question: why stay delta neutral? why focusing on the vol effect only when you could combine both and sell just the calls for instance? That is a fair question. We are not saying you should never consider this. Instead we are much bigger proponents of managing your risk to get the exposure you want. For instance, having a bit of a directional exposure in stocks is most of the time a good idea. You could have tweak you short strangle in MSOS to be a little bit short delta. The problem starts when you pepper leverage on top of a market view that is often closest to a cooking recipe than a rigorous scientific process to extract dollar out of the market. And too much leverage only leads to one outcome … indigestion.

Let’s see how that trade played out in the end.

The trade

In our Signal Du Jour from two weeks ago, we were presenting the opportunity to short the 5/6 strangle in May 15 in MSOS. At the time, the underlying had shot up almost 20% on positive news for the cannabis sector and the demand for options went through the roof. With that, our signals were showing some pretty good odds for those willing to be on the short side.

Considering the implied volatility at roughly 30 days, you had a 73% chance to see it exceed the subsequent realized volatility, which at the time sat at 60.6% and was expected to keep rising. We were also expecting the implied volatility to go down from there. The extra implied volatility compression, which really, should be understood as the excess of supply for options, as the market comes back to its senses and do not see hedging (or speculating) needs as primordial as a few days/weeks ago, should have helped carry our position and put it in the green a little faster than anticipated. That is, obviously, if implied volatility did collapse.

And indeed, it did.

From a peak above 80 the day of the announcement to a value much closer to the 50% in the weeks that follows, that factor alone should have carried our position in positive territory.

But as we stated in the introduction, direction cannot be totally ignored when an asset has taken 20% on the back of a positive headline. You know that volatility clusters and it can stay high for a while; and more problematic, the asset can start trending. Let’s be clear; the fact that we do not delta hedge could have been really hurtful for us, had the underlying kept trending on the way up, or on the contrary cratered after some sort of headlines saying that the classification to Schedule III was still far from a done deal. In both scenario, realized volatility could still have been below what we sold (roughly 80) and yet, we would have lost money.

This time though, the underlying stayed well behaved overall and despite retracing the entire move the next day of the announcement, went back up to settle right on one of the strikes of our strangle. Lucky? One always needs a little bit of luck in the headline game. But one should also primarily make sure the odds are on your side. Even after the heavy retracement the next day, our position were still not losing money considering how much implied volatility got also crushed — as people sold their calls.

Should you have kept the position longer? That is again up for debate. In that case, we think it was justified, especially when you consider the amount of commission paid relative to the premium collected. But you are often just a few headlines away to see another complete reversal in your profit. And for that, we are more inclined to take your profit when you can than to wait and squeeze as much theta as you can.

Let’s now look at the trade from a Greek attribution perspective.

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The Greek Attribution

Looking at the cumulative Greek attribution, this trade is a rare case where every component played its part — and played it well.

Delta was the single largest contributor at roughly $23. This might seem counterintuitive for a delta-neutral strategy, but it makes perfect sense when you consider the entry point. We sold the strangle when MSOS was sitting near its post-announcement highs, which baked a slight short delta bias into the position. As the underlying retraced the spike and drifted sideways, that bias worked squarely in our favor.

What stands out most is vega. For the better part of the first week, vega was generating more PnL than theta — something you almost never see in a short premium position. The implied volatility crush from above 80% to the low 50s was so aggressive that vega alone was outpacing daily time decay. It is only towards the end of the holding period, as the vol crush decelerated and expiration approached, that theta finally caught up. By exit, theta had accumulated roughly $20 while vega contributed about $14.

The daily attribution confirms the narrative. April 24th and 27th were the standout sessions — on April 27th alone, the position gained over $23 as delta, theta, and vega all contributed positively. The underlying was pulling back while implied volatility continued its descent. The only session of note on the negative side was May 4th, where a small delta reversal temporarily offset two days of accumulated theta.

The residual throughout was negligible, confirming the Greek approximations held up well.

The takeaway is mechanical: when you enter a short vol position at peak stress and the market cooperates, you are not just harvesting theta. You are collecting rent from the entire Greek stack — delta, vega, and theta all working in the same direction. That alignment is rare, and it is what turned a good trade into a clean $57 per structure.

Now let’s try to answer the pressing question: that trade went really well, and maybe there are still some edge in it, justifying putting another position? Let’s have a look.

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The S&P 500 added a little less than one percent while tech stocks continued their impressive recovery, adding almost 2% and now up 18% (!!!) since the end of Q1. What happened? Is AI postponed? The debts forgiven? Considering the Meta bashing this week, where the stock lost 10% over worries regarding spending in its AI initiatives, the answer to both questions is no. But in a year where the wildest fantasies around blockbuster IPOs for OpenAI, Anthropic, or even SpaceX are swirling, investors are piling in now and will ask questions later. Well, again, except for Zuck unfortunately.

So stocks are for now shrugging off the inflation concerns, and in that context, exactly like a year ago, realized volatility is getting obliterated.

We’ve lost 5 points since early April, and unless some new catalyst were to hit the newswire soon, the bet we would love to see on Polymarket is how many days until the next time we see realized volatility at 10. Sure, there are still two months before the summer, but unless a new bout of tension between Israel and Iran were to start soon, we are definitely on track for that. And if you were an optimist like us, you would think that no sane (that may be the problem here in this argument) president would want to squander the benefits of hosting the most important event on the planet (yes, the FIFA World Cup) by feeding the media with disturbing news from the Middle East.

That is, of course, heavy speculation on our end, and maybe a fair amount of wishful thinking. But until proven otherwise, while the Strait of Hormuz remains contested and the rhetoric still heavy in the press, missiles are not flying and the ceasefires are holding for now.

In this context, we still expect some realized volatility, of course, but something closer to 12 than 20 over the next two weeks. Mechanically, we should also start seeing the longer-dated forecasts come back to levels where the burden of proof falls on the bearer of bad news.

While we are not back to levels where you would get almost 5 points of VRP pretty much anywhere on the term structure, it is a much healthier picture than just a few weeks back, when it was negative across the board and the pain, as usual, was induced on the call side. So what to make of this? Well, it’s still not perfect, but in a much calmer regime, the market is likely to overreact to any sign of bad news or potential problems on the horizon. Our job now looks much more like end of 2025 than Q1 this year — any new spike in volatility needs to be carefully understood (is this something genuinely new, or pretty much the same, just a little scarier?) and … potentially sold.

Selling VIX 20 when realized volatility is at 14 is a great trade. Sure, it may feel a little uncomfortable — the memory of Hormuz and missiles over Dubai is fresh in everyone’s mind. But remember: these people are your customers and you can decide to happily sell them the insurance premium, or join them in buying overpriced insurance. Because at the end of the day, the numbers become stubborn — or sticky, to reuse one of the favorite words of the finance industry: you would need something truly astonishing to get us back to VIX 20 in a matter of 4 weeks, or to exceed what 5 weeks of arguably pretty hot tension in the Gulf didn’t manage to break.

Wishful thinking and optimism tinged with the first days of spring? We give you that. So let’s go back to some hard numbers.

The other number that we tend to follow closely is volatility of volatility, and it is also collapsing. In other words, the probability of seeing wild swings in the VIX is getting slimmer and slimmer. Now, it is still on the higher side of its range over the past two years, and while it’s a calmer market, it’s not a sleepy market quite yet. And often, our favorite kind of market: VIX 21 is not going to feel far-fetched to many market participants, but again, the VRP may have a totally different opinion.

Obviously, by definition, anything is possible. However, going from calm to stress overnight is rare, and until proven otherwise, not something that will happen in the snap of a finger. And if you are looking for where the action is, oil is still your perfect happy little playpen.

The option market is heavily backwardated and implied volatility is still very expensive (although obviously not as high as during March) — any day, with or without headlines, comes with its dose of high realized volatility and a perpetual demand for very expensive calls. Sharpe Two has never been a macro publication, but now that options on SPY have come back down to a more reasonable level, what is the probability of seeing realized volatility at three months in oil reaching 65+ and SPY only 19…? And if we were really going full macro and considering inflation, how about that term structure in TLT?

If you are looking for ways to finance some cheaper puts expiring toward the back end of 2026, you may have the trade right here.

In other news

It was a visibly more relaxed Jay Powell that showed up in front of the press on Wednesday for what was his last press conference as the Chairman of the Fed. And while there was nothing new we learnt about rate policy, he did give a few nuggets here and there that will make the market think in due time: first of all, he was never a fan of the dot plot despite being probably the best at forward-guiding the market over the last few years. This came while answering a question about his successor Warsh, who indicated that he didn’t believe … in forward guidance. And while Powell stayed as classy as ever by refusing to comment or debate, he also insisted on something we may not appreciate enough: Warsh will have his own style, make his own decisions, and if anything, the marketplace (and the journalists) will have to trust his judgment and his sense of independence rather than concluding so quickly that he will just say whatever the White House asks.

A wise message from a wise man. And some wisdom — that is all we wish the next Chairman; because with each week that oil spends above $100, that is most certainly another week of sleepless nights awaiting him six months to a year from now, especially if the White House keeps insisting (like Erdogan did a few years ago) that rates must come down as a solution to inflation running hot…

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Thank you for staying with us until the end. As usual, here are two great reads from last week

• The World Cup of Football is just around the corner and we were looking around for potential documented effect one could trade around it, involving stocks and (not prediction markets). It’s not exactly the most trivial effect to harness, but still an interesting one looking at IPO performance when done during a World Cup.

• And as we are heading for one particular hot summer again with temperature already reaching highs never recorded in parts of India for that part of the year, the hunt for a new earth is raging. A very interesting article mixing science fiction and the economic reality of our existence on Earth.

That is it for us this week. As always, be patient, be selective, and happy trading.

Ksander

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On the geopolitical front, oil is surging again. Brent crossed $118 after Trump doubled down on the naval blockade against Iran, and the Strait of Hormuz remains a bottleneck with no resolution in sight. But the real action this week is in earnings. Microsoft and Meta have already reported while Apple is expected tomorrow and AMD follows next week. For the semiconductor sector, this is the densest stretch of the earnings calendar, and options traders have been loading up on protection accordingly.

We have been watching SMH closely. The semiconductor ETF sits squarely in the middle of earnings season, with half of the Mag 7 reporting within a nine-day window, and the AI capex interrogation still looming over the sector. Our short vol signal list lit up on SMH this week, but with a twist: the opportunity is at 9 days, not the usual 30. We will explain why.

Let’s have a look.

The Context

A quick note on why we are looking at the 9-day horizon today instead of our usual 30. After a turbulent Q1 dominated by the Iran conflict, the Hormuz shutdown, and the market dislocations that followed, the options market has shifted where it prices fear.

The longer-dated insurance premium has largely normalized. But the front end of the curve is still loaded with headline risk and earnings weeks accentuate the effect. When Apple, AMD, and a handful of other semiconductor names all report within days of each other, traders buy short-dated protection in bulk. That is where the insurance premium concentrates, and that is where we need to look.

SMH has had a volatile year. The ETF started 2026 around $400, climbed through January and February as AI enthusiasm held, then sold off sharply as the war with Iran intensified and compounded the AI capex concerns that lingered from late 2025. By early April, SMH had fallen to around $310 before mounting a stunning recovery. It is now trading near $500, touching all-time highs, but the scars of that drawdown are still fresh in the vol data.

Realized volatility tells the story of a market that has been through a lot. Nine-day realized vol in SMH sits at 43.28%, which is above the 80th percentile of its two-year range (38.19%). At 30 days, realized vol is at 38.14%, also above the 80th percentile (36.46%). To put that in context, the two-year median for 9-day realized vol in SMH is 28.88%. We are running 50% above normal.

Realized vol running hot tells you where you have been, not where you are going. Our forecast expects 7-day realized vol to compress toward 31%, and the 30-day forecast settles around 33%. The war-driven daily swings are rolling out of the lookback window, and unless a new shock materializes, the direction is down.

With that in mind, let’s see how the options market has reacted and where the best opportunities lie.

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But the elephant in the room is oil, which jumped again 10% over the week. You could even say 15% if you consider the Jun contract in CL that jumped from $82 at the close last Friday to $93 this week. So what happened? You thought like us that all was left to do was to wait for the dust to settle? Well, the good news from the end of last week hit a wall of reality when the Iranian navy announced that the Strait of Hormuz would remain under their strict control, as long as the American navy continued its blockade of their ports. The situation escalated as a few ships got attacked or seized as they tried to cross the Strait anyway. You didn’t need much to rattle an already frazzled market, and back we are to levels where the different economies worldwide will be concerned about inflation at the very least, but a plain energy shock in some cases. While we already knew that the Philippines and some islands in the Pacific were basically in situation of energy crisis, Europe could be running out of jet fuel by the end of May. Quite timely as the summer holidays are just around the corner.

Gloomy, gloomy? Yes. But no. It is spring after all, and stocks are still up and so far shrugging off most of the concern.

So much so that after three very rocky months, our regime analysis was flagging the S&P 500 in … a calm regime. Surprising? Not really. And once again, this exercise requires a little bit of schizophrenia or, like Odysseus coming back from Troy, ignoring the song of the sirens. So let’s put the geopolitics aside and look at some hard metrics. First of all, realized volatility is collapsing.

You got about 10% over the last two weeks, and when you consider that over the last month that number is at 16%, this gives you an idea of how quiet things have gotten since the announcement of the cease fire. And while Trump has announced that he would be withdrawing a team of negotiators supposed to land in Islamabad to discuss with the Iranian authorities, the fact that he extended the ceasefire this Tuesday was a pretty convincing factor for the market that at least, for now, things may not escalate much further. Vol of vol has also come back from the highs of early April.

And while it stays elevated, the current trajectory will make it much easier for the short volatility position: it is less likely to see the VIX take 5 points within a few hours and while we ventured a few times above the 20 handle this week, the moves were much more contained than what we got accustomed to over the last three months. We ended the week at 18.5, not in complete chill territory (we very subjectively put that threshold at 16) but far from concern central either. This detente is also perfectly reflected in the term structure as well as the skew.

Yes, you could sell (or buy, depending how you felt in the moment) a 10 delta put at 30+ IV a month ago; that price has completely collapsed and with it the skew got flatter. From a pure data perspective, this is indeed a much healthier market than the situation we were facing about a month ago when the wildest theories were circulating in the financial and social media. So what’s next?

Once again, we will stay away from the geopolitics. But from a pure data perspective, we will give it a few days to validate that we are now into that new calm regime and go back religiously to one of our favorite mantras: “Trade the regime you are in, not the one you think we may be in in a few weeks”. Yes we give you that, things may not last, but at that stage, nobody knows and as retail it is sometimes as humbling as necessary to be reminded that … your view is mostly priced in. It is extremely unlikely that the millions of people expressing their opinion through futures options and on all the different asset classes do not reflect the most elegant analysis you can stumble upon. And things being priced in doesn’t mean you cannot make money; things being priced in means back to the status quo and with that … our dear friends the variance risk premium.

While it is still meager in the range of 25 to 45 days to expiration, it is now back in full force in the reasonably short dte. Do not make us say what we didn’t: don’t start trading 0 dte like it’s 2024 again but 14 dte? Why not - realized volatility has already collapsed, the market is still paying pretty hefty prices for the “just in case something happens”. You may have a few cold sweats on the next scary headline but 6 points of VRP is not negligible anymore. It is obviously not an invitation to go all in, but something that is tradable. Especially because from a pure forward volatility perspective, the market sees little to no event risk over the next few weeks.

That is of course, if we keep having tacos on Tuesdays and that the situation unfolding in the Middle East finds an epilogue soon so that … the American politicians can enjoy the summer and the World Cup?

In Other News

We learnt this week that Tim Cook would pass the baton as CEO of Apple to become executive chairman of the board. John Ternus, Apple’s head of hardware engineering, will take over in September. We wish him good luck. Because the world has a knack for the artists, the creators, the eccentrics, the disruptors (of whom Steve Jobs is the perfect modern example) but tends to be a little bit harsher with profiles like Cook. However, one needs no less genius to transform an already winning company into the global powerhouse it has become after 15 years under his leadership. How many CEOs do you know who have managed to multiply the market cap of their organization tenfold? And yes, we give you that, it's not just him, the market went up overall. But still; the market is not known for just falling in love with good product and has a tendency to favor cash flow over anything else. And when it comes to cash flow, it’s hard to compete with what Cook has accomplished, all of that without a single major controversy, staying true to himself and his character. Between him and Jay Powell, whose term as Fed Chair ends next month, these are two pillars of the recent economic landscape to whom we will soon have to wave goodbye.

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Thank you for staying with us until the end, as usual, here are two great reads from last week:

• Anthropic got caught red-handed trying to fool the entire planet that Claude’s performance hasn’t gone down. But the backlash was real, and some very competent engineers were pointing out the obvious. Whether this was intentional or not, we may never know. But on Thursday, we learnt that they recognize a drop in performance and addressed the issue. Quite timely; on the same day, GPT 5.5 dropped.

• The rich don’t play by the rule, so why should I? We almost choked on our morning tea when we read that headline. That reminded us of an old data science use case we may have done for a government showing that the classic trick of the “rounding error” in the revenue was pretty well distributed, and not dependent on your economic status. But you would still commit this crime (yes, it is a crime) in the intimacy of your home. If micro-looting is a justification for class struggle, then what’s next? Killing the CEO of a company may be a completely justifiable idea? Oh … wait…

That is it for us, we wish you a wonderful week ahead and as usual, happy trading.

Ksander

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We have seen this movie before. Cannabis has a long history of spiking on regulatory headlines and fading once the details emerge. The DEA has no administrative law judge to conduct rescheduling hearings (the last one retired in August 2025 and was never replaced), 48 Republican lawmakers have formally opposed the move, and the SAFER Banking Act still has no scheduled Senate floor vote. None of that stopped the options market from pricing MSOS as if the reclassification is a done deal and the sector is about to double.

Our short vol signal flagged MSOS this week, and the numbers are some of the strongest we have seen in any name all year.

Let's have a look.

The Context

MSOS has spent most of 2026 going nowhere. The ETF started the year around $3.80, drifted down to $3.08 by late March, and was quietly trading in the $3.80-$4.10 range for most of April. Then yesterday happened. From $4.28 to $5.11 in a single session on 55 million shares, roughly five times the average daily volume.

Here is what caught our attention: realized vol in MSOS was entirely unremarkable before yesterday. Thirty-day realized vol sits at 60.64%. To put that in context, the two-year median for 30-day realized vol in MSOS is 62.12%, and the 80th percentile is 72.05%. We are right at the median. For a sector that trades like a leveraged biotech play, this is about as calm as it gets.

Our forecast does expect some expansion from here. The model projects 30-day realized vol to rise from 60.64% toward 67.42%, which would push it toward the upper half of the historical range but nothing close to the extremes. The 7-day window is where the spike will hit hardest as yesterday's move rolls into the lookback (7-day RV is already at 74.40%), but even at 14 days and beyond, the forecast stays well below 80%.

Before we move on, let’s make something clear though: rescheduling would be transformative for cannabis. Nobody disputes that. We just do not think the options market should be pricing it as if the DEA signed off yesterday, because they did not, and the process from here is neither fast nor guaranteed.

With that in mind, let's see what the options market is pricing and whether it has gotten ahead of itself.

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