The recent market dynamics have created a paradoxical situation where investors are failing to take advantage of limited-loss opportunities in the volatility space. Despite a hawkish Fed, global tightening, surging oil prices, escalating Middle East tensions, rising 10-year yields, and approaching US midterms, the VIX closed Friday with a 14 handle. This disconnect between market conditions and investor behavior raises questions about the timing of volatility purchases and the role of convexity in the current market environment.

To better understand this phenomenon, let’s delve into the concept of index convexity and single-stock convexity. Index convexity sits below the 10th percentile, indicating that investors are not fully compensated for taking on risk. On the other hand, some single-stock convexity is at the 0th percentile, suggesting that investors are not adequately protected against potential losses in specific stocks.

While the data suggests that investors have started to re-risk, timing remains difficult in the volatility market. However, limited-loss expressions are available at levels not seen in months or even years, providing a unique opportunity for investors to buy convexity when they can, rather than when they need to.