Traders who have been waiting for the right moment to bet against stock volatility have rarely seen the stars align like this.

After soaring some 500% in the pandemic crisis, a popular strategy tracking the Wall Street fear gauge, formally known as the Cboe Volatility Index, looks ripe for a fresh plunge that would deliver gains for short sellers.

The iPath S&P 500 VIX Short-Term Futures ETN -- a $900 million long-volatility product with the ticker VXX -- could soon get hit by a rare bout of bearish momentum, according to Dean Curnutt, CEO of Macro Risk Advisors. Thank technical forces in the VIX derivatives landscape and easing price swings powered by the latest stock rally.

“VXX could have a real target on its back,” Curnutt wrote in an email. “Unless realized volatility picks up considerably.”

As U.S. stocks surge back toward records on improving economic data, policy support and vaccine hopes, the VIX has remained elevated, frustrating volatility shorts. But with historical volatility dropping, the implied measure looks ready to fall anew. That would provide a direct boost to those investors betting against the VXX since it tracks the level at which the near-term futures contracts trade.

“Realized vol explains 75% of the level of the VIX,” Curnutt said Wednesday. “With 2 week realized at 13 now, the VIX cannot remain at 25 if this low trend continues.”

Another reason why bears have a spring in their step is the shape of the futures curve, or the relative prices of the volatility contracts. When the front of this term structure is upward-sloping, as is the case now, VXX loses money just by rolling the contracts.

The curve looks likely to stay that way. Investors have dramatically bid up the price of October futures, whose value is linked to options that expire after the U.S. general election, amid expectations of a volatility surge around the November vote.

“Typically, when vol is this high, the curve is flat to inverted, so you don’t get the roll down,” according to the MRA chief. “Conversely, when the curve is steep, vol is low, so you can’t really win on implied vol coming in -- now the setup may be for both to occur.”

Of course, the elevated VIX suggests there may be fireworks in the near-term horizon, if extraordinary U.S. fiscal support eases. To account for the riskiness of the trade, the advisory firm suggests a “put tree” structure, or a combination of buying and selling the contracts at different strikes.

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