The U.S. government shutdown has injected a new layer of uncertainty into the markets, yet volatility has barely flinched. For traders, that disconnect between headline risk and implied volatility may represent an opportunity hiding in plain sight.
The CBOE Volatility Index ($VIX) — often referred to as Wall Street’s “fear gauge” — tracks the market’s expectations for 30-day volatility in the S&P 500 Index ($SPX) based on option prices. When traders grow anxious, VIX spikes; when they’re complacent, it falls.
Right now, the VIX is hovering near 16, below its long-term median around 19-20. That’s striking given the current backdrop: an ongoing government shutdown, tariff uncertainty, and mixed signals from the Federal Reserve. In other words, there’s no shortage of potential catalysts for turbulence, yet the market’s pricing of risk looks unusually calm.
For context, the VIX soared above 50 earlier in 2025 when President Donald Trump’s tariff announcement jolted global markets. That move was significant, marking the first time since the pandemic that the index closed above 40. Since then, volatility has cooled dramatically, with the VIX briefly pushing above 20 in mid-October before retreating to current levels.
In recent months, the VIX has fluctuated mostly between 14 and 25, with historical extremes closer to 10 on the low end and 90 on the high. Now sitting near 16 in late October, the index is hovering at the lower edge of its typical range, a sign that markets may be conspicuously complacent given the heightened degree of uncertainty associated with the current market backdrop.
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Historically, the VIX has maintained a strong negative correlation with major stock indexes, particularly the S&P 500. When the S&P 500 sells off sharply, the VIX almost always spikes higher as traders scramble for downside protection through index and single-stock options. Conversely, when the market trends upward or drifts sideways, volatility expectations typically fall.
That inverse behavior makes the VIX an appealing instrument for both speculative and defensive positioning. While the index itself can’t be owned directly, traders can gain exposure through VIX options and futures, which track expectations of future volatility. For those already comfortable trading single-stock or ETF options, VIX options will feel familiar in structure. That said, their correlation dynamics and settlement mechanisms differ from equity-based contracts.
The key is understanding that the VIX tends to move opposite to stocks. If the market continues to grind higher, the VIX will likely remain muted, falling slightly or trading sideways. But if the S&P 500 enters a corrective phase, volatility would almost certainly spike, and long VIX call positions would assuredly benefit.
From a strategic perspective, that setup can serve two primary purposes:
Speculation: Targeting potential gains from an increase in near-term volatility.
Hedging: Using options to help offset potential losses in a long equity portfolio should a sudden downturn materialize.
In the hedging scenario, a long VIX call position can act somewhat like an insurance policy, gaining value as portfolio holdings decline. The trade-off, however, is timing. Like any option, VIX calls are sensitive to duration (e.g. expiration). As such, buying an October weekly contract won’t help if the volatility event materializes in November. That’s why the alignment of a suitable expiration date is so crucial when constructing these positions.
Ultimately, how one approaches the current situation depends on their outlook.
If you believe markets will remain calm through the remainder of the year despite policy uncertainty and the ongoing government shutdown, then a bullish volatility position may not be the best fit. Under that scenario, the VIX would likely continue to oscillate within a tight range (14-20), offering limited opportunity for long-volatility trades to appreciate.
However, for those anticipating renewed turbulence, or simply looking to protect against unforeseen developments, the current VIX level near 16 may appear more attractive. From that perspective, long VIX calls or short VIX puts could be used to express a bullish volatility view, though the two approaches carry very different risk profiles.
A long call provides a defined-risk way to participate in a potential volatility rebound, the most you can lose is the premium paid to enter the position. A short put, on the other hand, offers income potential but exposes the trader to substantially higher risk if volatility declines or decays over time. In a favorable scenario, both strategies would theoretically benefit from a move higher in the VIX, but their risk-to-reward profiles differ significantly.
However, with the stock market hovering near all-time highs, one must also keep in mind that 10% corrections in the stock market are relatively common. And “healthy” pullbacks like these often produce a swift upward move in the VIX, even if short-lived. In the current market environment, that means a well-timed long VIX call position could serve as a tactical trade or a portfolio hedge, capturing value when complacency gives way to fear.
On the date of publication, Andrew Prochnow did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
