Closing Thoughts

Greetings and happy holidays Alpha Exchangers. I hope you’ve had a chance to unwind and share some quality time with your families as I did with mine. Recently, we had to say goodbye to our dear family pet Griffin. Dog truly can be a man’s best friend and the Griff and I were side by side for 11 years. I will miss him. It was a great run. On the positive side, I’ve been lucky enough to have all 3 of my children home for the break, an increasingly rare occurrence. They say that you will have spent 90% of all of your time with a child up until the age of 19. Most of you are younger than I am…so some advice from this old-timer…be present, I say and enjoy these times. If you can, take 10 minutes to check out a recent TedX talk from my dear friend Allegra Cohen on a concept she calls “microjoy”. You will find yourself recentered.

On the markets front, we are, as widely expected, ending the year on a quiet note. I asked ChatGPT to calculate the % moves of the SPX over the last seven trading days of the year. I did have to tell it not to write Python code, but it got the job done anyway. We all recall the down 2.7% Christmas eve, up 5% day after Xmas caper in 2018. But almost always there is nothing going on. Since 2010 the average of the absolute value of the daily moves is just 56bps. Eliminate 2018 and you are at just 47bps. That is skinny. Zoom out and it’s not just a holiday inspired decline in vol. One month realized on the SPX is 8.8. Even 3 months, which captures the 3 week, 5% SPX drawdown that began as October ended, is only 12.4.

And it’s not only equity vol that suffers from George Constanza like shrinkage. The “risk free” asset class, the US government bond market is actually living up to its name. The daily moves have narrowed dramatically in the TLT where 1 and 2m realized are 6.7 and 7.8%, respectively.

What I hope to present to you over the next thirty-five odd minutes is some version of “closing thoughts.” As I do so, I want to look back on 2025 with an eye towards pointing out its unique characteristics from a market risk perspective. I probably say this too frequently, but these are fascinating times with a lot at stake.

Embracing the notion that absolutely anything can happen in markets is a good starting point for risk management. But for right now, the aforementioned absence of meaningful daily moves on the important macro assets is imposing downward pressure on option prices. The SPX and TLT are, recently at least, accident free and that’s all the market cares about in pricing options. Count me as pretty excited that we will start 2026 with market insurance that feels reasonably priced. It’s a nice offset to the car, health and homeowners insurance affordability mess most folks are experiencing.

Let’s start this exercise in closing thoughts by highlighting what I consider to be 2026’s three most interesting days from a vol and risk perspective. And that must begin with the chaos that ensued post April 2^nd liberation day. Previously, there were only two other instances when the VIX surpassed 50, the GFC and the Covid Crash (we exclude 1987). The Tariff Tantrum is the third. On April 7^th, the Monday after the SPX experienced a 2-day 10.5% melt, we were all forced to ride the VIX roller coaster, hands free, I might add.

April 7th was truly wild as the market was caught in the cross-hairs of unreliable information that hit the tape on the severity of tariffs. Around 9:45am, we saw the VIX fall from 54 to 38 in just 30 minutes and then rise back to 53 over the following 14 minutes only to fall to 44 over the next 30 minutes. There’s only one word that comes to mind: Absurd.

Markets simply cannot absorb that level of risk for too long. Things break. And it became clear to me that the “VIXgilantes” would require a full blown “never mind” from Trump on April 9th to restore order. He obeyed orders from the market. This was a good lesson in thinking about trading the policy response. That is, anticipating how market prices would force the Administration’s hand and how those prices would react once the retreat occurred. I wrote a fair amount about this, using the Bill Gross GFC strategy to “shake hands with the government and buy what they’re buying” only this was to sell what they’re selling, in this case the VIX. You knew the VIX could not be allowed to remain in the 50’s because the GFC and Covid precedents told us that it would be 50 on the way to 80. Hopefully, Don Jr. got his VXX short off at the April 8^th peak. Just kidding. Maybe.

The next most interesting day, for me at least, was the September 10th surge in the share price of ORCL. Recall, this was earnings date for the company and it came with a forecast of a tremendous revenue increase along with a tie-up with OpenAI. The stock price jacked higher by 36%. Larry Ellison briefly overtook Elon Musk as the world’s richest man. But the stock is down 40% since. And most interestingly, the 5Y CDS spread has risen 100bps from 45 to 145 since 9/10. Does the market’s judgement of ORCL’s credit have information content and is it some shorthand for whether AI financing aspirations are too ambitious? Zooming out, ORCL is up 19% on the year and its CDS is more than 100bps wider. Its 2m implied vol has nearly doubled from 25 to 45. The equity is being treated more like an option than a stock. ORCL may be unique in just how aggressive its borrowing and capex plans are relative to its market cap. But, if we look at 5y CDS for a basket of GOOG, AMZN, AAPL, MSFT and AVGO, that’s up from 24 to 36bps this year. The 5y IG, by contrast is flat on the year at 50bps. Too early to derive any strong conclusions, but put this on your dashboard of metrics to watch for market warning signs.

The last most interesting day is the October 21st Gold Meltdown. As its cousin silver delivers epic vol on moves both higher and lower, let’s recall the dramatic spiral up and one day unwind that the GLD experienced in late Oct. One of my little sayings is that “risk on and risk off are curious cousins” It’s a nod to the way in which profits from a trade invariably draw attention and lure in fresh capital, eroding the margin of safety in the process. When the success of a risk-on episode is significant enough, it paves the way for a sharp unwind. In the limit, like a GME, it’s a certainty that it will occur.

While timing is never easy, It wasn’t difficult to see the giant one day unwind of very extended positioning in the GLD coming. The GLD had rallied 10.3% over just seven trading days (10/9-10/20). That’s just way too much for a 15 vol asset and the FOMO nature of gold led to a chase.

All of the classic signs were there – a spike in implied vol (the GVZ reached 32.8), an inverted vol termstructure, an inverted call skew and massive call volume.

I shared the following on Twitter on October 8^th,

“The strength of the recent gains in Gold, paradoxically does two things at once: first, the rising price is the advertisement compelling folks to buy. There’s no Graham and Dodd valuation work to do. As Soros said, “when I see a bubble forming, I rush in to buy, further adding fuel to the fire.” The rising price is a source of new demand. The rate of change of upside moves is accelerating. Since 2023, there are 14 days when the GLD has move up 2% or more. Eight of them have occurred since April.

Second, as the “sky is the limit” narrative builds, implied volatility rises reflecting the market’s understanding that the risks are becoming more two-way. That is, for folks wanting to play the upside, using call options may be preferable as the recent strong gains could quickly reverse. The call option permits you the right to walk away if wrong. 2m implied vol on the $GLD has gone from 15 to 18 over the last 2 months even as realized vol has fallen from 15 to 13. This is not about how the option is carrying (i.e., implied vs realized). It is simply about one-way demand for options.

You wind up in a situation where the strength of the risk-on creates the vulnerability for the risk-off as those investors in early take profits and those in late try to limit losses. It’s a sharp unwind that clears out positioning. It may be good for 3-5% decline over a few days. The option dynamics may accelerate it. If the buyers of all the calls that have traded in GLD are outright and the sellers are hedging, you might get some feedback as these hedgers need to rebalance their deltas by selling into a falling market.

When an asset experiences a “stock up, vol up” event that is substantial enough, there’s really no way for it to unwind expect a “stock down, vol down” reversal. GME in 2021, MSTR in 2024-2025 are examples. This also occurred in silver in 2021 as it is now.

And that naturally leads to the next part of this review which is to highlight two main themes in risk, the first of which is that stocks are behaving like options. As the prices of many companies rise, the market assigns their option a higher implied volatility. This is completely antithetical to the relationship between the SPX and VIX, which have a consistent correlation of around -80%. Take GOOG for example, up an astounding 65% this year. At one point in late November, two-year 20% out of the money call implied vol reached 39, up 12 on the year. This is a MASSIVE increase. To give you a sense, a 2y 120% call at 39 vol costs 64% more than it does at 27 vol (the level we saw at the start of this year).

This is the market’s way of assigning a considerably wider degree of potential outcomes to the stock. The relationship between GOOG vol and spot isn’t atypical, it’s just a good example of the vol characteristics common to today’s highfliers. Stock returns and implied vol are very often positively correlated these days. It’s a reflection of a winner take all market in which speculation and taking convex upside bets has been rewarded.

The other side of this stock up, vol up dynamic is the seller of vol. Hedging upside calls used to be easier. The stock would rise, typically gently, and implied vol would fall in the process. Now, upside price shocks underpin volatility by a far greater degree than in the past. Over the second half of 2025, GOOG is realizing 32.6 vol on up days and just 20.7 on down days. The seller of upside calls is having to contend with this new kind of return distribution and account for it in his or her hedging protocol.

Consider 2 year implied volatility on both GOOG and NVDA at 36 and 46, respectively …8.3T of combined market cap and both have Aa2 ratings from Moody’s with tons of cash and FCF. Credit risk, often a driver of volatility in an equity, is not a thing that comes to mind for these money printing enterprises.

NVDA’s market cap is 40x that of GM and F. yet Their 2 year implied vols are around 32. The carmakers are rated BBB, the bottom rung of IG. For these companies, unlike the tech mega caps, debt can be an issue.

Why the lofty long dated option prices on GOOG and NVDA, even as their stock prices are doing so well and their credit ratings gold plated? My take is that the market cap of the tech behemoths is so large and has increased so quickly that the options market is struggling to provide insurance against loss on them. The option price may clear at a high level because there’s not enough natural capital ready to bear risk of loss. All else equal, a higher premium is needed to bring sellers to the table.

There’s almost an options market equivalent of what’s happening in the broader insurance industry ... Premiums are simply higher and it’s not necessarily only a result of risks that are materializing today. It’s more about compensation for future uncertainties and, related, a shortage of capital.

But tech stocks aside, if there were an annual “Stock Up Vol Up Award” (perhaps there ought to be, btw), it must go to silver in 2026. Let’s take a look-->

1. the SLV is up 150% on the year

2. 2m implied vol started the year at 25. It is ending it in the 60’s.

3. The Correlation between price and 2m implied vol is running consistently >90%

4. Realized vol on up days 32.4 versus down days of 29.4

5. Since November, up day vol 53.6 vs. 26.9 on down days

6. 8 moves of >4% up versus just 2 of 4% down

7. massive call volume, far outstripping put volume

8. a highly inverted vol termstructure …the market prices short dated vol higher than further out vol

9. a highly inverted call skew …the market is paying a 17 vol premium for a 1m 10d call versus a 1m 10 put.

As silver spiked, there are lots of takes on whether to be in the mean reversion or momentum camp positioning long or short. With respect to the latter, I often quote Soros who said, “when I see a bubble forming I rush in to buy, further adding fuel to the fire.”

My framework suggests that when a stock up vol up event is this protracted, it’s more likely than not that lower prices and lower vol are coming. But here’s the thing about a market dislocation…as you think about capitalizing on it, you’ve gotta respect the forces that created it in the first place.

Market prices don’t stray far from fundamental value without very good reason. And those same forces could very likely push it even further away. Think the 29.5 vs 30 year UST basis in 1998 due LTCM’s leveraged position gone wrong. Think the 2008 Volkswagen squeeze. The 2009 implosion of the div swap market. The 2010 blow-up in long-dated SPX variance. The 2020 crude melt-down. The previously mentioned 2021 spiral in GME. The 2022 short squeeze in Nickel. The UK Gilt crisis in 2022.

In each of these, the vol and correlation assumptions that investors, credit risk officers, and exchanges had assumed proved remarkably wrong. Suddenly, the existing trades, underwritten at much lower vols and correlations, became much larger in terms of value at risk. The process of finding the right sizing can amplify an already unstable situation.

All of this is to say, be careful. If you see a trade that looks compelling and is a result of a large dislocation, commit only a small amount of capital to it. Whatever your bias, the massively expanded vol makes a given dollar at risk more uncertain. Be smaller. Or find an option structure that limits your losses in the scenario in which the trade moves against you.

And speaking of dislocations, I’m a Big fan of the “The Big Short” book and movie and I’m firmly in that camp versus “Margin Call” (which I also enjoyed). In the Big Short, Mark Baum (Steve Carell) asks the exact two-part question which gets to the heart of how to think about systemic risk: “Is there a housing bubble? And if there is, how exposed are the banks?”

You need two ingredients for a real spillover event: 1) a large mispricing and 2) leverage

When you get these in combination to a substantial degree, disaster awaits. Ultimately, the market is forced to confront the mispricing (in this case of mortgage credit risk and correlation). When that process imposes losses on mark to market sensitive investors, a reflexive risk unwind can materialize.

There are plenty of instances when a repricing does not lead to wide-scale spillover. The Internet bubble comes to mind (though 2002 was quite a credit widening event). The unwind of the Euro-Swiss peg in 2015 is another. There were some smaller hedge funds that went under but it didn’t become systemic.

What you need is a significant combo of Mark Baum’s 2-part question. A big mispricing and widescale exposure to it through leveraged entities that are mark to market sensitive. And then, to hit the home run that John Paulson did, you have to perfect the structuring and timing of a convex trade. What was so entirely unique about the pre-GFC era was that a centerpiece of the bubble inflating was massively downward pressure on risk premiums like the VIX and credit spreads. While these measures will start 2026 at pretty low levels, they ended 2006 much lower in a system in which a tidal wave of leverage was set to come undone. 2y implied vol on the SPX hit 13 back then. It’s 19 now. The straddle costs 50% more using 19 vol versus 13.

With that little detour, let’s return to our two main themes on risk. As discussed, stocks are behaving like options and the market is reacting to the consistency of “stock up, vol up.” These aren’t just Meme or Degen stocks. These are market behemoths like Google. Over time, as the tech trade has gotten larger and larger, so too has its weight in the S&P 500.

It’s no secret that the SPX is epically concentrated with high vol tech names. “this ain’t your father’s index...you’ve gotta know what you own”. Passive investing can lead to some strange outcomes... in 2000, depending on how one measures it, the P/E of the SPX reached 30-40x. Today, it’s quite elevated but not at that extreme. That peak of the tech bubble will forever be a very tough valuation comp.

What is extreme today is the concentration with very volatile stocks. “The Index” that attracts so much passive capital and is a benchmark that no one can ignore is top heavy like never before with stocks all pursuing the same AI riches. Here are some stats.

1. the top 4 stocks are 27% of the index.

2. the top 8 have combined market cap of 22.4T and are 40% of the SPX

3. these top 8 have a 2 year weighted average implied volatility of 37%

4. the next 8 have a combined market cap of 6T (10% of the SPX) and get you to half the index market cap. 16 stocks are half the SPX.

5. these next 8 have much lower vol than the first 8. the weighted 2y vol for them is just 27.

In words, we can describe the SPX as

“An index that is highly tracked, highly concentrated with highly volatile, highly valued tech stocks that have proven remarkably uncorrelated to each other.”

And that’s the second theme I want to highlight, as I have all year. The low level of correlation among stocks and the risk implications of this new phenomenon.

First, let’s establish that Markets generally price what they see and experience. A scatter plot of 30 stocks will show a very consistent cross-sectional relationship between realized and implied vol. The same goes for correlation. As 2025 ends, one-year implied correl on the SPX is basically a match for 1y realized correl. Just as the marginal price setters for vol are beholden to the feedback between RV and IV, so too is the mathy dispersion crowd reliant on how correlation carries. Low RC justifies Low IC.

But to be clear, one-year implied correl at 21% is really, really, really low. There’s no equivalent, except last month, last quarter and last year. This isn’t entirely new and that is part of what I think makes it risky. When a clearing price endures, no matter how high or low it appears to be, it makes its way into how we consume risk. Because the dispersion trade - buying single stock vol and financing most of the premium by selling index vol - is working, even at low levels of IC, more of it will be done. The profits it generates get recycled back into the same trade that spit them out in the first place.

There are a couple of things to think about here. First, consider the relationship between realized correl and realized vol for the SPX. A chart I posted on Twitter shows that for a given level of realized vol, realized corr used to be considerably higher than it is today. There are two ways to interpret this. First, single stock vol is doing more of the heavy lifting today to generate the overall index vol.

The second way to look at this is that given these very high single name vols that come from a top heavy, tech concentrated SPX, a tremendous amount of diversification is occurring to keep the index vol where it is. The incredibly low realized corr is a significant vol suppressant. Will it continue? I’m not so sure.

A second chart I posted on Twitter illustrates a similar point but does it through implied vol. I created an index of the simple avg 1y implied vol for NVDA, GOOG, MSFT, AAPL, AMZN, META, AVGO and TSLA. One of the time series shown is the ratio of that to 1y SPX implied. The second series is 1y implied correlation, inverted. Not surprisingly, these move closely in tandem.

So, the question might logically be, “is single stock vol too high or is index vol too low?”... That’s actually not the question. It doesn’t matter. It’s the relative price that matters and I strongly believe it’s too low. That is to say that single stock vol is too high relative to index vol or as I prefer to say it, index vol is too low relative to single stock vol. Framing it this way is consistent with the view that the repricing higher of implied correlation is more likely to occur in tandem with a higher overall implied vol environment. If the global economy slows for example, commitment to the Capex cycle could get tested, causing a broad and correlated retreat in share prices.

Let’s explore how the relationship between single stock and index vol reprices. First. A shorthand for implied correlation is (index vol / weighted ss vol)^2... Using 37.4 for the average of the Big 8 in the CIX I created and 17.4 for 1y SPX implied, that squared ratio is 21.5%...right where Bloomberg has 1y IC on the SPX.  Let’s flip the formula around and ask what happens to index vol as we keep SS vol the same but move IC to 35. The 13.3-point bump in correl adds 4.7 vols to SPX vol. That is a very large move in 1y implied vol. And to be clear, 35 is still very low for implied correlation historically.

There are two primary channels of repricing. First, a macro shock like the April Tariff Tantrum. As I shared in a chart on Twitter, implied correlation spiked during that episode. It was, of course, self-imposed by Trump and thus relatively easy to undo via a “just kidding” (on 4/9). But there are many channels for macro shocks - monetary policy, geopolitics, a slowing economy, a glitch in the Shadow banking system - to name a few.

The second channel is less about global macro and more about the AI ecosystem and how intertwined these companies are. They are all chasing the same riches, spending fabulous sums, making lofty assumptions, and increasingly raising lots of debt to do so. The capex spending itself is keeping this going. As long as the capex cycle is robust, the market caps are supported, which, in turn, supports the capex. It does remind me of how both the mortgage credit and LBO funding machinery kept the the leverage cycle going 20 years ago. 

And there is a more technical vantage point from which to contemplate the repricing of SS vol to index vol. This concerns the prominence of “stock up, vol up” in today’s US market, even in mega-caps. It’s the feature of this market that is most like the Internet bubble. As mentioned, GOOG is up 65% YTD and its 2y implied vol was recently up as much as 12 from the start of the year. As suggested earlier, the stocks themselves are options. As they rise, the market pays more and more for the lottery ticket.

Here’s the analogy back to the dotcom era: from the peak in March 2000 to the end of 2004, the QQQ fell by 65%. The Nasdaq VIX  fell from 50 to 19 in the process. In the current market, if the AI trade loses some of its shine, you could see the stocks driving it not just fall in price but fall in implied vol as well. What goes up, must come down kind of thing as the “optionality” of the trade falls. This process would also lead to implied correlation rising, perhaps by a fair amount.

All of this is to say that we are at the lowest level of SPX 1y implied correlation we’ve seen and there are multiple pathways to it rising from here. It’s a real vulnerability for the market as it would make the SPX considerably more volatile than it currently is. And we know that the same conditions that make stocks more volatile make them more correlated as well. It’s a double whammy.

We can look back on 2026 as a year of highs and lows. The SPX is up 17% on the year even as it experienced a 19% drawdown along the way. Don’t call it a comeback, as LL Cool J told us. 1m realized vol on the index was as high as 51 and as low as 6. For correlation, the peak was 67 and the low was, wait for it Dean Wormer… Zero.point.zero. Correlation has no grade point average. Note that we are ending the year with 1m realized correlation of 8. You can’t blame the market for pricing 1m implied correlation at 11. I argue that that number is eventually going higher because stocks are eventually going to start moving more closely together.

The market, the investing public and the economy at large are over-exposed to the AI trade. So too are the AI stocks over-exposed. I certainly can’t predict when or if something will go wrong, but these ultra low correlations are the equivalent of driving without a spare.

As I close this discussion, I want to say thank you for being a listener. I was able to host 26 podcasts this year with extremely high quality guests. These are hedge fund and asset management CIOs, fintech founders, heads of strategy efforts and leaders of independent research firms. The conversations are not about predicting the next move, but in seeking to add value to the process of portfolio construction and risk management. I’ve also, including this one, dropped 15 podcasts in which I’ve shared my own thoughts on risk. I’m looking forward to a year of expansion for the Alpha Exchange in 2026. I’ve got some creative new ideas for delivering content and look forward to bringing them your way.

Until next time, have a relaxing holiday and rest up for what promises to be a critical year in markets. Be well.