Here’s one of the biggest paradoxes in trading: the more people know about volatility and prepare for it, the less likely it is to actually happen. When too many market participants all have the same knowledge about potential volatility events, they end up suppressing the very thing they’re trying to protect against.
When Everyone Is Hedged, Nothing Happens
Think about what happens when everyone knows a big volatility event is coming. Let’s say there’s a major Fed announcement that everyone expects to move markets. What do traders do? They hedge. They buy puts, they reduce positions, they purchase VIX calls, they build protective spreads.
But here’s the problem: when everyone is hedging for the same event, all that hedging activity actually stabilizes the market. All this defensive positioning creates a cushion that absorbs the very shock everyone was worried about.
It’s like a crowd of people all bracing for an earthquake at the same time. Their collective preparation actually makes the ground more stable, not less.
Why Surprise Is Essential for Volatility
Real volatility spikes happen when markets get caught off guard. They need an element of surprise to be truly effective. When something unexpected happens and participants aren’t prepared, that’s when you get the massive, cascading moves that create huge volatility.
Look at some of the biggest volatility events in recent history. The COVID crash in March 2020 caught almost everyone off guard. The 2008 financial crisis escalated far beyond what most people thought possible. These events created massive volatility precisely because the knowledge and preparation weren’t there.
Contrast that with events that everyone sees coming a mile away. How many times have you seen “obvious” volatility setups—like contentious elections, major economic announcements, or geopolitical tensions—end up being complete non-events? The market just trades sideways or has modest moves that disappoint all the volatility buyers.
The Crowded Trade Problem
When too many people have the same information and make the same trades based on that information, it becomes what’s called a “crowded trade.” And crowded trades in volatility are particularly self-defeating.
If everyone is buying VIX calls before an event, the VIX gets bid up before anything even happens. The volatility gets priced in ahead of time. When the actual event occurs, even if it’s significant, the volatility move has already happened in the pricing. The VIX might actually drop after the event because the uncertainty is resolved, even if the market moves.
This is why you’ll often see the VIX spike in the days leading up to a known event, then crater immediately after, regardless of what actually happens. The knowledge of potential volatility creates the volatility in the pricing, not in the actual market movement.
When everyone knows the same trade, it stops working. The edge gets arbitraged away by the collective action of all the people trying to exploit it. The very knowledge that was supposed to give you an advantage becomes the thing that eliminates the advantage.
This is why volatility traders who have been around for a while often say that the best setups are the ones that nobody is talking about. When a potential volatility event is all over Twitter and trading forums, it’s probably too late to profit from it.
The Information Feedback Loop
When information about potential volatility becomes widespread, it reduces uncertainty. When uncertainty decreases, volatility decreases. The very act of sharing knowledge about volatility events makes those events less volatile.
When Knowledge Actually Creates Opportunity
Understanding how knowledge suppresses volatility can actually create trading opportunities. When you see massive positioning for a volatility event that everyone is talking about, it might be better to fade the volatility rather than buy it.
This contrarian approach requires careful risk management, because sometimes the widely anticipated volatility event actually does happen. But historically, fading the consensus volatility trades has been profitable more often than following them.
The Diminishing Returns of Popular Strategies
As volatility trading strategies become more popular and widely known, their effectiveness tends to diminish. This is true for both simple strategies and sophisticated ones.
The classic “buy VIX calls when VIX is low” strategy used to work much better when fewer people knew about it. Now that it’s widely discussed and implemented, the VIX tends to stay elevated longer and the strategy is less profitable.
Even complex strategies like dispersion trading and volatility surface arbitrage become less effective as more people learn about them and implement them. The knowledge spreads, more capital chases the same opportunities, and the edges get smaller.
Market Structure Changes
The structure of modern markets also contributes to this effect. There are more sophisticated market makers, better price discovery, more liquid hedging instruments, and faster information flow. All of these improvements make markets more efficient, but they also make them less volatile.
When information travels faster and hedging is easier and cheaper, markets adjust more quickly to new information without creating large price dislocations. The very improvements that make markets “better” also make them less exciting for volatility traders.
The Eternal Cat and Mouse Game
The relationship between knowledge and volatility creates an eternal cat and mouse game. Traders discover volatility patterns, exploit them, share knowledge about them, and eventually eliminate them through collective action. Then new patterns emerge, and the cycle starts over.
This dynamic means that volatility trading will always require constant adaptation and learning. The strategies that worked in the past become less effective as knowledge spreads, forcing traders to find new edges and approaches.
What This Means for Volatility Traders
Understanding how knowledge suppresses volatility should change how you approach volatility trading:
Be skeptical of widely known volatility setups - If everyone is talking about it, it’s probably already priced in or hedged away
Look for contrarian opportunities - Sometimes the best trade is to fade the consensus volatility expectations
Focus on surprise events - Real volatility comes from things people aren’t prepared for
Stay ahead of the curve - Constantly look for new patterns and approaches before they become widely known
Understand the hedging dynamics - Think about how collective positioning might actually suppress the volatility you’re trying to trade
The Bottom Line
Knowledge might be power in many areas of life, but in volatility trading, too much shared knowledge can actually work against you. When everyone knows about a potential volatility event and prepares for it, that collective preparation often prevents the volatility from happening.
This doesn’t mean that knowledge is bad or that you should ignore obvious risks.
The most successful volatility traders understand this dynamic and use it to their advantage. They look for opportunities that others aren’t prepared for, fade the consensus when appropriate, and constantly adapt as market knowledge evolves.
Remember: in volatility trading, the best opportunities often come from what nobody sees coming, not from what everyone is preparing for.