The Iran conflict pushed the VIX from 15 to 25, hitting a recurring resistance level from the past year but remaining well below the tariff crisis level, showing a moderate crisis.

In contrast to typical strategy of shorting VIX/VXX into strength (reversion), investors covered their short VXX positions as squeeze risk reached maximum levels.

The VXX saw a simultaneous 10% drop in short interest and a decline in outstanding shares. Long investors liquidated long positions to take profits.

The VIX is the benchmark volatility index that measures the expected volatility in the S&P 500 over the next 30 days. While the normal level has historically hovered in the high teens, 25 has emerged as a recent crisis level—though it remains low compared to previous market crises.

The VXX is the ETN related to the VIX, a structure complicated by the fact that it owns VIX futures, which possess their own unique pricing dynamic. The VIX has risen from 15 to 25, driven by geopolitical conflict, reaching this high-water mark repeatedly over the last 10 months. (Previously, it hit 50 in April of last year as a result of trade tariffs).

As the VIX/VXX moved higher, short interest has fallen as investors shorting the VIX covered their positions. The classic position in the market is to short the VXX to capture the "roll yield," as the VIX futures term structure is usually upward sloping (contango). The primary risk in that trade is exactly the current situation with rising VIX.

Historically, short interest rises alongside higher prices, a mean-reversion strategy where investors increase short exposure when the VIX is elevated. In this case, there is a notable decoupling; investors are not shorting into strength but are covering instead. Some investors hedge short VXX positions with short equities or S&P 500 puts.

When the VIX/VXX rose recently, the short squeeze risk went from the 70 range to as high as 100, indicating that in addition to the ETN being highly crowded, shorts were losing money.

Following this, the short interest fell 10% in a mini-squeeze.

At the same time the shares outstanding fell as investors who were long as a hedge took profits.

With the war, both long and short investors are risk averse. Short investors covering, long investors taking profits.

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