How Knowledge Kills Volatility
The more people prepare for volatility, the less likely it is to happen
The more people expect volatility and prepare for it, the less likely it is to actually happen.
When too many traders all have the same knowledge about potential volatility events, they end up suppressing the very thing they’re trying to protect against.
When Everyone Is Hedged, Nothing Happens
Think about what happens when everyone knows a big volatility event is coming. Let’s say there’s a major Fed announcement that everyone expects to move markets. What do traders do? They hedge. They buy puts, they reduce positions, they purchase VIX calls, they build protective spreads.
But when everyone is hedging for the same event, all that hedging activity actually stabilizes the market. All this defensive positioning creates a cushion that absorbs the very shock everyone was worried about.
It’s like a crowd of people all bracing for an earthquake at the same time. Their collective preparation actually makes the earthquake less lethal.
Surprise Is Essential for Volatility
Big volatility spikes happen when markets get caught off guard. They need an element of surprise to be truly effective.
Look at some of the biggest volatility events in recent history. The COVID crash in March 2020 caught almost everyone off guard. The 2008 financial crisis escalated far beyond what most people thought possible. These events created massive volatility precisely because the knowledge and preparation weren’t there.
Contrast that with events that everyone sees coming a mile away. How many times have you seen “obvious” volatility setups—like contentious elections, major economic announcements, or geopolitical tensions—end up being complete non-events? The market just trades sideways or has modest moves that disappoint all the volatility buyers.
The Crowded Trade Problem
When too many people have the same information and make the same trades based on that information, it becomes what’s called a “crowded trade.” And crowded trades in volatility are particularly self-defeating.
If everyone is buying VIX calls before an event, the VIX gets bid up before anything even happens. The volatility gets priced in ahead of time. When the actual event occurs, even if it’s significant, the volatility move has already happened in the pricing. The VIX might actually drop after the event because the uncertainty is resolved.
This is why you’ll often see the VIX spike in the days leading up to a known event, then crater immediately after, regardless of what actually happens. The knowledge of potential volatility creates the volatility in the pricing, not in the actual market movement.
This is why volatility traders who have been around for a while often say that the best setups are the ones that nobody is talking about. When a potential volatility event is all over trading forums, it’s probably too late to profit from it.
The Diminishing Returns of Popular Strategies
As volatility trading strategies become more popular and widely known, their effectiveness tends to diminish. This is true for both simple strategies and sophisticated ones.
The classic “buy VIX calls when VIX is low” strategy used to work much better when fewer people knew about it. Now that it’s widely discussed and implemented, the VIX tends to stay elevated longer and the strategy is less profitable.
Even complex strategies like dispersion trading and volatility surface arbitrage become less effective as more people learn about them and implement them. The knowledge spreads, more capital chases the same opportunities, and the edges get smaller.
At CI Volatility
We are skeptical of widely known volatility setups - If everyone is talking about it, it’s probably already priced in or hedged away
We look for contrarian opportunities - Sometimes the best trade is to fade the consensus volatility expectations
We focus on surprise events - Real volatility comes from things people aren’t prepared for
We stay ahead of the curve - Constantly look for new patterns and approaches before they become widely known