While US President Donald Trump's tariff threats over Greenland captured significant attention and drove the narrative for broader equity markets throughout last week, astute investors were simultaneously implementing strategic hedges against risks emerging from other quarters. Only three weeks into the year 2026, the prevailing market pattern appears remarkably similar to the dynamics observed last year: President Trump issues provocative threats, financial markets initially display signs of distress and uncertainty, then, as tensions gradually de-escalate over subsequent days, stock prices resume their methodical upward trajectory.
The Familiar Volatility Spike and Reversal Pattern
For volatility markets, this has become an all-too-familiar sequence of rapid spike followed by swift reversal. The Cboe Volatility Index, commonly known as the VIX, experienced a notable jump on Tuesday, only to retreat quickly, settling below the level recorded the previous Friday. By the week's end, the VIX futures curve had returned to an almost identical shape, underscoring the transient nature of these volatility surges.
Strategic Hedging Beyond Headline Risks
Meanwhile, away from the Trump-driven headlines that primarily influenced broader market indexes and the VIX, numerous investors were actively positioning hedges against two specific categories of risk: geopolitical tensions that could adversely impact shares of Chinese companies, and the potential for disappointing earnings reports from major technology firms. Last week witnessed substantial hedging activity, with investors purchasing approximately 400,000 lots of March-expiring put options in the iShares China Large-Cap ETF. This was complemented by acquisitions of 20,000 contracts in the KraneShares CSI China Internet ETF and 150,000 put options in the Xtrackers Harvest CSI China A-Shares ETF.
Christopher Jacobson, co-head of derivatives strategy at Susquehanna International Group, provided insight in a research note, suggesting, "Without an obvious specific catalyst, these investors may simply be positioning for an escalation in US-China tensions, perhaps following China's recent criticism of the US's trade deal with Taiwan." There is a growing consensus among market strategists that investors are becoming increasingly adept at positioning for the so-called TACO trade (Tariffs And China Offensive), which effectively limits both the magnitude and duration of volatility spikes.
Market Psychology and the Trump Playbook
Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets, analyzed the prevailing market psychology, stating, "It seems very much like he's playing this playbook of like, 'I'm going to go in kind of mad dog style. No one really knows what I could do.' And then you almost need the market to have a tantrum and then he will back off. From an options perspective, it's when you see those potholes, those are pretty good signals of getting short volatility or reaching for a little upside."
Remarkably, even significant geopolitical tensions have demonstrated a limited capacity to sustain elevated volatility levels. President Trump's framing of the Greenland deal in terms of national security establishes a potential precedent that China could reference when articulating its own strategic terms concerning Taiwan. Antoine Bracq, head of advisory at Lighthouse Canton, observed, "Markets appear increasingly desensitized to breaches of international laws—whether in Venezuela, Iran, or Greenland. A similar indifference has prevailed in response to military exercises around Taiwan and the ongoing invasion of Ukraine."
Tech Sector Hedging Ahead of Earnings
Concurrently, hedging activity against potential declines in semiconductor stocks intensified ahead of a crucial week of earnings releases from some of the technology sector's most prominent names, including Apple Inc., Tesla Inc., and Meta Platforms Inc. Investors proactively purchased January 30 put options in Nvidia Corp., Oracle Corp., and Broadcom Inc., indicating cautious positioning.
The Resilience of the US Economy and Retail Participation
Antoine Bracq further elaborated on the current market regime, noting, "For now, any market corrections are likely to remain short-lived as long as the US economy is perceived as resilient. In this context, a VIX level above 20 could represent an attractive selling opportunity for retail investors." He identified potential disappointment in the technology sector and deterioration in the labor market as key factors that could disrupt the prevailing low-volatility environment.
Against this backdrop, with retail investors demonstrating a continued willingness to 'buy the dip,' VIX spikes are expected to remain brief, contingent upon economic data supporting further Federal Reserve interest rate cuts and sustained US economic growth. This dynamic could shift if rising unemployment and inflation reach levels sufficient to dampen retail investment flows. Antoine Porcheret, head of institutional structuring for the UK, Europe, the Middle East and Africa at Citigroup Inc., highlighted this risk, stating, "Retail have been a big part of the 'buy the dip' trade—so that is a risk if those buyers disappear, which can happen with rising unemployment if they have less disposable income."
Monitoring Market Structure and VIX Dynamics
Market analysts are also closely monitoring evolving market structures that could signal shifts in the volume of volatility being traded, particularly via zero-days-to-expiry (0DTE) options or within the Quantitative Investment Strategy (QIS) domain. Derivatives strategists at UBS Group AG note that the increasing prevalence of 0DTE options has recently contributed to a shorter gamma profile among dealers. This structural change could potentially drive greater intraday volatility as dealers rebalance their positions, marking a departure from traditional market positioning.
Additional areas warranting close observation include VIX dealer positioning and activity in exchange-traded products (ETPs) linked to the volatility index, which have recently experienced fund outflows. Historically, the monetization of long volatility ETP positions during periods of market stress has acted to dampen VIX spikes. However, with current positioning being comparatively lighter, this stabilizing influence may be diminished, potentially increasing the VIX's reactivity to market events.
With assistance from Bernard Goyder. ©2026 Bloomberg L.P. This article was generated from an automated news agency feed without modifications to text.
