Back Derivatives Strategy

Owning VIX Calls Continues to Make Sense Given Geopolitical Concerns, and a New Small Cap (IWM) August Hedge Trade Idea

Published on June 22, 2025

Jeff Jacobson

Both the markets and volatility ended the holiday-shortened week mostly flat last week. The S&P (SPY) lost ~ 1/2 a percent, the tech-heavy Nasdaq (QQQ) was flat and VIX was off small after spiking nearly 25% the prior week. Volatility should pick up significantly this week given the developments over the weekend. I still favor being long vol at these levels (against this geopolitical backdrop) via VIX calls and/or wide call spreads, and still believe July expiry is more than fine to own here with nearly a full month until expiration. As I have continued to stress, I believe there is a “floor” to vol at slightly lower levels, and that floor has now likely been moved higher given the ongoing situation in the Middle East.

While I do like owning VIX upside structures here as a macro portfolio hedge, I wanted to re-visit the small caps (IWM) as I also now believe they once again look attractive as a macro market hedge. Why should investors own IWM put spreads now to hedge equity exposure? First, after declining by ~ 30% from their November highs, IWM staged an impressive 25% rally off the April lows. That rally stalled exactly at the 200-day moving average (IWM had been above its 200-day since Dec 2023 and broke below that support this past February). Perhaps even more concerning for the small caps is that after underperforming the market (SPY) by a huge amount between early Feb and the April lows, they were barely able to outperform as the market rebounded sharply off the lows. Second, while there are many reasons why small caps have continued to lag (more impacted by higher yields, less passive investment, etc), perhaps the much smaller weighting in technology is the reason why they have continued to lag? IWM has only a 15% weighting in technology/communication, while SPY has nearly 3x the exposure at ~ 43%. With the tech/AI trade once again leading the market, this should continue to weigh on the small cap performance. Lastly, not only are IWM puts still trading “cheap” relative to both SPY and QQQ puts (especially beta adjusted to SPY), but IWM put skew is now back at the 2-year highs. This combination of a sharp rally to clear resistance, continued underperformance to large caps, and cheap vol and very attractive put skew makes owning IWM put spreads attractive once again in my opinion.

Trade:
Buy IWM Aug 203 puts (34-delta, 24.5 vol)
Sell IWM Aug 180 puts (9-delta, 32.2 vol)
Costs ~ $3.45 (IWM 209.21 Fri close ref)

Trade Details:

Buying the August IWM put spread following 25% rally off the April lows right into resistance at the 200-day
Of concern for IWM is that there was no meaningful outperformance to the large caps (SPY) on this latest market rally after a significant period of underperformance as the market sold off
IWM puts remain “cheap” relative to SPY (beta adjusted) and 10d/40d put skew now back to the 2-year highs (the out of the money puts are “rich” to the closer to the money puts)
Put spread starts 3% below spot, offers a nearly 6x to 1 max payoff, and is capped to the downside 14% below current levels (and just above where IWM bottomed in April)
Selling the 180 puts covers ~ 26% of the cost of owning the 203 puts (speaks to the attractive put skew)
Please contact me or the 22V sales team for updated pricing and execution capabilities

IWM declined by ~ 30% from the Nov highs to the April lows. The 25% rally off the April lows stalled right at the 200-day moving average ~ 215

IWM 2-month 10d/40d put skew back at the 2-year highs (bottom chart)

While off the lowest levels, IWM 40-delta puts still screen “cheap” to SPY 40-delta puts (bottom chart)

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