FX168 Finance News (Asia Pacific) reports that if investors expect the market to remain calm in 2025, they should be wary of more impact events like those in August, as uncertainties surrounding Trump's tax and tariff policies may disrupt the market.

Strategists from Bank of America, JPMorgan, and Spain's BBVA believe that the continued selling of Options will generally depress volatility. JPMorgan expects the average value of the Cboe Global Markets Volatility Index (VIX) to be around 16, slightly higher than the 15.5 in 2024. However, BBVA points out that a series of factors could trigger more volatility, including: rising uncertainties in U.S. tariff policies; geopolitical tensions; excessive concentration and valuation; signs of stress in funding markets; and a weak job market.

BBVA strategist Michalis Onisiforou wrote in a client report: "The continued economic growth and the popularity of volatility sell-off strategies should support a structurally low-volatility environment in the U.S. and Europe. However, several factors point to a higher overall level of volatility and more frequent volatility bursts."

Bank of America expects that the market will feature long periods of calm interrupted by the "fat tail effect" (i.e., sudden large fluctuations). The bank predicts that the frequency of vulnerabilities in the S&P 500 Index will be five times higher than in the past 80 years, and believes that the market may be approaching another large-scale shock event at the index level.

Technical factors suppressing volatility.

Bank of America notes that zero days to expiration Options (0DTE), quantitative investment strategies pushed by Banks, and ETFs that increase yield by selling Options will supply the market, leading brokers to adopt long gamma strategies. This often suppresses market volatility as brokers need to buy more Futures or Stocks when the market falls and sell when the market rises to maintain position balance.

JPMorgan also mentions that while technical factors suppress volatility, macro indicators suggest that volatility should be higher. Data shows that the reasonable average for the VIX should be about 19. Although volatility selling by U.S. and European investors is expected to continue, Asia, especially China and Hong Kong, is experiencing higher demand for volatility driven by economic pressure, stimulus measures, and uncertainties related to U.S. tariffs.

Pierre de Saab, partner and chief investment officer of Dominice & Co. Asset Management, stated: "The current low-volatility environment may be temporary: investors have priced in all the bullish news regarding Trump's policies but have overlooked the potential negative impacts these policies may bring. The upside potential for the market in 2025 may be weak, while the risk of severe turbulence due to Trump's unconventional policy approach will be higher."

The dual impact of tariffs and tax policies.

UBS Group strategists believe that the hedging effect between tariffs and tax cut policies may lead to more volatility. The head of US equity derivatives research at the bank, Max Grinacoff, stated: “In the first half of next year, we may directly enter a relatively high stock volatility environment.”

UBS stated that a potential escalation of tariffs could prompt the Federal Reserve to shift to a more dovish stance, thereby reducing bond volatility. The bank recommends buying S&P 500 Index straddles expiring in June 2025, while financing by selling straddles on iShares 20+ Year Treasury Bond ETF.

Hedging recommendations.

Societe Generale strategists predict that volatility will continue to rise from 2025 to 2026. The bank's derivatives strategist Jitesh Kumar stated: “Our model predicts that volatility will increase, recommending to Buy when volatility declines.”

Both Bank of America and JPMorgan recommend hedging the risk of a sharp market decline by purchasing VIX Call Options and selling S&P 500 Put Options at a low holding cost. Since the volatility index reacts quickly during market turmoil, this combined position can provide cushioning when the market is impacted, while earning premiums through S&P 500 Put Options.

Bank of America also launched customized basket diversification trades, pointing out that record stock fragility drives its performance. Bank of America strategist Benjamin Bowler noted, “The fragility shock of the largest components of the S&P 500 in 2024 has reached extreme levels not seen in 30 years, which may not alleviate if the AI frenzy continues.”