UBS Equities-US Equity Derivatives Strategy _Its all relative Relative ...-118963199

ab20 November 2025Global ResearchUS Equity Derivatives StrategyIt's all relative: Relative value opportunities amidst a higher volatility environment1) VIX put calendars to position for some volatility normalization post the 'wall of worry' [Figures 1-11]Volatility has finally bubbled over at the index level with Q3 earnings (particularly NVDA) in the rearview. Fragility risks remain with CTA trigger levels lurking nearby and Volatility Control exposures still elevated, while the long gamma overhang has largely dissipated. Volatility risk premia has risen, but further upside reflexivity appears limited. We think we are now at levels where it appears more attractive to position for some volatility normalization as impending event risk passes, albeit to higher lows. Investors may consider VIX Dec/Jan put calendars (selling Jan puts to fund Dec puts) to position for volatility normalization and curve re-steepening over the next few weeks.2) NDX > SPX volatility for an AI boom or bust – featured in our 2026 Outlook [Figures 12-15]Long volatility at the outright index level has been a difficult trade to carry this year, particularly post-April. If investors are considering hedging in index space, we continue to see opportunity in trading index relative value between Tech+ exposed Nasdaq 100 (NDX) volatility relative to S&P 500 (SPX) volatility through 2026. Investors may consider structuring this trade via an NDX/SPX ATM straddle swap, delta-hedged daily (sized vega neutral at inception). Growing index concentration and investor crowding in the highest-weighted names have increased market fragility in NDX and SPX, even more so in the former. This could be particularly impactful in the instance the AI tailwind were to falter (i.e. AI bust scenario). We think this trade could also benefit in an AI boom scenario where investor enthusiasm and momentum-chasing continue to percolate ('spot up, vol up').3) Capital structure RV via SPX dividends vs. HYG put spread switches [Figures 16-19Figures 16-19]Our US Credit Strategists forecast in their baseline scenario a very narrow range of outcomes for US HY yields in the coming quarters, barring a full-scale bond market or private credit shock. They expect realized volatility in credit to remain low as moderate spread widening in Q4 and Q1 is offset nearly uniformly by falling Treasury yields. More aggressive Fed rate cuts could thus dampen some of the volatility in HYG, acknowledging spread widening will likely exceed the decline in US interest rates. Conversely, dividend futures could be more exposed in part due to the material share of Tech and Financial payers in the index. Downside performance in S&P dividend futures has typically exceeded that in HYG during credit stress events, given: 1) One-way risk in dividend futures during market stress scenarios given indiscriminate selling pressure from dealers, and 2) Risk that dividends could in fact be cut (in addition to buyback programs or any other form of corp