The investment landscape is continuously evolving, and as we look towards the year 2025, it appears to be a year characterized by a deceptive calm that could conceal unforeseen market upheavals reminiscent of the turbulence experienced in August of this yearThis sentiment is underscored by persistent uncertainties surrounding tax regulations and tariffs, which hold the potential to unsettle market stability.

Analysts from major banking institutions such as Bank of America, JPMorgan, and Spain's Banco Bilbao Vizcaya Argentaria (BBVA) have been closely monitoring the current trendsIn their forecasts, they predict that ongoing options sell-offs could lead to a suppressive effect on market volatility in the interimSpecifically, JPMorgan anticipates an average CBOE volatility index (VIX) hovering around 16 in 2025, slightly surpassing the projected 15.5 for 2024. Intriguingly, BBVA's strategists caution that a confluence of elements—including escalated uncertainties regarding U.S

tariff policies, heightened geopolitical tensions, market concentration and overvaluation, early signs of stress within the financing markets, and a weakening labor market—could trigger increased volatility.

According to Michalis Onisiforou, a strategist at BBVA, clients were informed that sustained economic growth, coupled with a burgeoning liquid volatility-selling strategy, may bolster a structurally low-volatility environment in both European and American marketsHowever, Onisiforou also alluded to multiple indications suggesting that the volatility levels in 2025 may indeed rise significantly, making erratic market movements more frequent.

From Bank of America’s perspective, the market may undergo a phase where a prolonged period of tranquility gives way to what's termed a "fat tail" event, marked by abrupt and extreme fluctuationsIt is worth noting that the bank anticipates a fivefold increase in the frequency of vulnerability shocks to the S&P 500 compared to historical averages from the past 80 years

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Furthermore, they suggest that another significant index-wide shock event might be overdue.

As quantitative investment strategies tied to zero-day options and the influx of banking institutions selling options in pursuit of hefty returns increase market supply, traders will likely find themselves compelled to continue taking long gamma positionsSuch maneuvers, particularly when traders buy more futures or stocks during market downturns and subsequently sell during rebounds to maintain balance, typically serve to dampen market volatility.

Despite this technical suppression of market fluctuations, JPMorgan highlights that macroeconomic indicators indicate an expected increase in volatility, stating that a reasonable mean for the CBOE volatility index should hover around 19. This contradiction poses critical implications for investors trying to navigate the unsteady waters of the market.

Furthermore, Pierre de Saab, partner and Chief Investment Officer at Dominice & Co

Asset Management, suggests that the current low levels of volatility might not be sustainableDe Saab postulates that investors have absorbed all the positive news associated with impending policy changes, potentially overlooking adverse consequences that could stem from said policiesHe elaborates on the possibility of lesser room for upward movement in markets during 2025 compared to 2024 or 2017, citing an augmented risk of severe disruptions resulting from unorthodox practices.

Adding to this discourse, UBS analysts have pointed out the imminent impact of proposed tariffs on exports combined with domestic tax cuts, which could coincide to induce greater market volatilityMax Grinacoff, head of U.Sequity derivatives research at UBS, opines that by the first half of next year, we may find ourselves stepping into a notably volatile stock market environmentThis happening simultaneously with a potential escalation in tariffs could prompt the Federal Reserve to adopt a more dovish stance in its monetary policy, thereby minimizing bond market volatility.

Furthermore, strategists at Societe Generale share a similar view, indicating that the window for declining volatility is narrowing

Jitesh Kumar, a derivatives strategist with the firm, expresses that models predict a consistent uptick in volatility extending into 2025 and 2026.

To hedge against significant sell-off risks during this precarious financial landscape, both Bank of America and JPMorgan recommend buying call options on the volatility index (VIX) while simultaneously selling put options on the S&P 500. The VIX is known for its responsiveness to market turbulence, providing a buffer through long positions, while traders can also profit from the premiums obtained from selling S&P 500 put options.

In their strategizing, JPMorgan and Bank of America advocate for customized basket spread tradesBank of America emphasizes the unprecedented level of stock vulnerability—characterized by sudden fluctuations compared to historical volatility—that has become a driving force in market performance

As highlighted by strategist Benjamin Bowler, conditions observed in 2024 saw S&P 500 components experiencing the most extreme levels of vulnerability shocks in over 30 years, the continuation of which could be perpetuated by the ongoing AI frenzy.

Amidst all these, cross-asset trading, which witnessed explosive growth in 2024, remains prevalent as financial markets approach 2025. JPMorgan notes a decrease in the Euro Stoxx 50 index and a rise in the yield on 10-year U.STreasury bonds, noting a dual binary optionThis behavior suggests that markets are beginning to react to the incoming government's more radical implementation of campaign promises revolving around immigration, tariffs, and onshore business practices.

Lastly, Antoine Bracq, head of advisory at Lighthouse Canton—a family office based in Singapore managing around $3.5 billion—expresses caution regarding the potential consequences of rising interest rates and new tariffs