NVIDIA's financial report and the Federal Reserve's decision are approaching, and hedging strategies are shifting towards U.S. stock options, while cheap VIX has become "yesterday's news."

The Zhitong Finance APP learned that hedging has once again become a hot topic. Jerome Powell's speech at the Jackson Hole annual meeting ignited market expectations for a Federal Reserve rate cut in September, pushing U.S. stocks back to near historical highs. Given that stock market positions are generally at high levels, investors are actively discussing the most effective ways to protect profits ahead of Nvidia (NVDA.US) earnings, employment and inflation data releases, and the Federal Reserve's interest rate decision.

"Powell's remarks were more dovish than the market expected, and the market clearly responded positively," said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group. "We are seeing some investors increase their protective positions on the S&P 500 ETF and buy call spreads on the SPDR Gold ETF as part of an inflation trading strategy."

As the market remains in a "buying the dip" mode, many strategists recommend put option spreads on the S&P 500 index; recently, if the market continues to oscillate upward in the short term, backward-looking or reset put options are also considered useful. However, there is a notable "absentee" among recent hedging tool choices: buying call options on the Chicago Board Options Exchange Volatility Index (VIX) — which is typically a common hedging tool for investors.

"In the current market environment, vanilla put options or put spreads on the S&P 500 index may be more reliable hedging tools," noted Tanveer Sandhu, global head of derivatives strategy at Bloomberg Intelligence. "Additionally, the volatility skew of the S&P 500 index is relatively steep, which helps reduce the cost of put spreads."

JP Morgan strategists pointed out last week that the U.S. fiscal deficit and Donald Trump's pressure on the Federal Reserve may begin to exert dual pressure on Treasury bonds and the stock market. They suggested adopting a binary trading strategy: betting that the S&P 500 index will fall more than 5% by the end of the year while the 10-year U.S. Treasury yield rises by 0.2%. In the European market, the digital put option spreads on the Euro Stoxx 50 index are relatively cheap, with the volatility of out-of-the-money put options with a strike price 5% away from the current level for one month being around the 20th percentile of the past year.

One reason for the "absence" of VIX options as a hedging choice is the cost issue. Bank of America strategists emphasized in a research report last week that VIX call options appear overpriced compared to S&P 500 put options.

This mainly reflects that the volatility of VIX options has risen relative to the volatility of S&P 500 options, while the latter is under pressure due to actual volatility being at extremely low levels. The so-called "volatility of volatility" (vol-of-vol) appears expensive on a relative basis, consistent with the generally high levels of other convexity indicators.

"Hedging is a balance between cost, time decay, reliability, and convexity," Sandhu stated. "The market still exhibits strong buying-the-dip characteristics, and after a surge in volatility, it has fallen back at a record pace, making VIX call options potentially unreliable and difficult to realize profits."

Moreover, the steepness of the VIX futures term structure leads to higher holding costs. Since futures tend to decline along the curve to converge with the spot index — rather than the spot rising to futures levels over the long term — call options further become out-of-the-money, with their value continuously eroding Why is the yield curve so steep? One commonly mentioned reason is the influx of funds back into VIX exchange-traded products (ETPs). These products gained notoriety due to the "volatility apocalypse" event in 2018: at that time, shorting VIX ETPs attracted a large amount of investment, leading to a short squeeze in VIX futures when volatility rose, ultimately causing products like VelocityShares Daily Inverse VIX Short-Term ETN to be completely liquidated.

JP Morgan strategist Bram Kaplan and others pointed out that, in contrast, recent fund flows have shifted towards bullish funds: since April, inflows into bullish leveraged VIX ETPs have exceeded $2.5 billion, while outflows from inverse VIX funds have surpassed $1 billion. The daily rebalancing operations of these products lead them to sell short-term VIX futures and buy long-term contracts, further exacerbating the steepness of the yield curve.

Leveraged VIX ETPs may amplify volatility: to maintain their target leverage ratio, they buy futures when volatility rises and sell futures when volatility falls. However, VIX call option buyers may be more concerned that during the next stock market decline, a large sell-off of futures could occur as fund investors cash out their profitable trades.

VIX call option buyers may still vividly remember: the stock market sell-off at the end of February exhibited low volatility characteristics, during which S&P 500 put options performed better. Although investors who bought VIX call options before April 2 had better returns, their excess returns compared to simple stock put options may still not be sufficient to justify large-scale allocations in hedging portfolios.

The biggest event before the September Federal Reserve meeting is this week's NVIDIA earnings report. The options market suggests that the stock may experience a 5.8% volatility after the earnings announcement, consistent with the average volatility observed in the past eight quarters following earnings reports. The one-month implied volatility is at the 32nd percentile of the past year, and trading volume has been on a downward trend since early 2025.

"As of yesterday, the options market's attention to NVIDIA's earnings report was not high," said Steve Sosnick, chief strategist at Interactive Brokers, last Friday. "But they should be paying attention! Whether by weight or psychological impact, NVIDIA is the most important stock in the market. If the company fails to validate the AI boom that supports the current bull market, market sentiment could undergo a significant shift."