Latest / The Day Trading Podcast with Fexingo: Active Trading, Charts, and Short-Term Market Strategy / How Day Traders Read the VIX 17 Level for Volatility Entries
Transcript
- Lucas: Alright, the VIX is sitting at 17.40 this morning, up about 3 percent over the last five days. But the VVIX — that's the volatility of volatility index — has jumped more than 8 percent to 95.28. That divergence is worth a closer look. Luna: So the VIX is creeping higher, but the VVIX is sprinting. What does that tell us about what the options market is pricing in? Lucas: Exactly. The VIX itself measures implied volatility on S&P 500 options — roughly the market's expectation of 30-day forward volatility. The VVIX measures the implied volatility of VIX options — so it's the market's expectation of how much the VIX itself will move. Luna: Right, so when VVIX rises faster than VIX, it signals traders expect bigger swings in the vol index itself, even if the overall level hasn't moved much. Lucas: Bingo. And that's interesting because we've spent the last several episodes talking about VIX at 15 or 16 — low-vol regimes where range-bound strategies worked well. But 17.40 is a different animal. Historically, VIX between 17 and 19 has been a kind of neutral zone — not complacent, not panicked. But the VVIX spike tells us the market is bracing for something. Luna: And that 'something' could be the Fed. We've got Waller talking about how the Fed shouldn't 'fight the last war' on inflation, and the odds of a July hike are rising. That's exactly the kind of event that could shake the VIX out of its recent range. Lucas: Yeah, the CME FedWatch tool has the probability of a 25-basis-point hike in July up to around 35 percent now. That's not a done deal, but it's enough for options traders to start hedging. And the VVIX spike reflects that — traders are buying protection on the VIX itself, expecting it to move. Luna: So how do you actually trade this? If you're a day trader looking at a VIX at 17.40 with VVIX diverging, what's the play? Lucas: Let's break it into two scenarios. Scenario one: you think the VIX stays range-bound between 17 and 18. In that case, you might sell VIX call spreads — betting that the VIX won't break above 18. But the VVIX spike warns you that the range could widen, so you'd want to keep position sizes small. Luna: And scenario two? Lucas: Scenario two: you think the VIX is about to break higher — maybe above 18, toward 19 or 20. Then you'd buy VIX call options or VIX futures. But the key is using the VVIX as a confirming signal. When VVIX is above 90 and rising, it historically precedes VIX moves of at least 2 to 3 points within a few weeks. That's a pretty strong signal. Luna: So the VVIX level of 95 is telling you the market is pricing in a VIX move of, say, 2 to 3 points. That puts the VIX potentially at 19.40 to 20.40 in the next few weeks. Lucas: Right. And that's consistent with what you'd expect if the Fed actually delivers a hike in July. A hike would likely push the VIX up temporarily, maybe to the 18-19 range. The VVIX spike suggests that's at least partially priced in. Luna: But let's not ignore the other headlines. Chinese humanoid startups rushing to IPO — that's adding idiosyncratic risk to the small-cap space. The Russell 2000 is down 1 percent over the last five days, underperforming the S&P. If those IPOs start to stumble, it could drag on the broader market. Lucas: That's a good point. The Russell has been lagging — it's at 2,953, down 1 percent over five days while the S&P is up 0.2 percent. That divergence itself is a volatility signal. When small caps underperform, it often indicates that risk appetite is shrinking. And a shrinking risk appetite tends to push the VIX higher. Luna: So you've got the Fed narrative, the small-cap divergence, and the VVIX spike all pointing in the same direction — higher vol ahead. Lucas: Exactly. But the interesting thing is that the VIX is still only at 17.40. That's not high. So you're not betting on a crash — you're betting on a shift from low vol to moderate vol. And that's actually a more tradeable environment than extreme panic. Luna: Because in low vol, you're selling premium and collecting small pennies. In moderate vol, you can buy options at reasonable prices and ride a trend. Lucas: Right. And the VVIX divergence gives you an edge — it's telling you the move is coming before the VIX itself has moved. That's the kind of signal day traders live for. Luna: So what's the concrete setup? Walk us through an entry. Lucas: Sure. Let's say you're a day trader with a one- to three-day horizon. You see VIX at 17.40, VVIX at 95 and rising. You might buy the VIX September 18 call for around $0.80 to $1.00. That gives you exposure to a move above 18 through September. The breakeven is around 18.80 to 19.00, which is well within the historical move that a VVIX of 95 suggests. Luna: And for the more aggressive trader? Lucas: More aggressive — buy the VIX September 19 call for maybe $0.40 to $0.50. Higher risk, higher reward. But you'd want to see the VIX break above 17.50 first as confirmation. Don't front-run the move. Luna: And what about the downside? If the Fed doesn't hike, or if the Chinese IPOs go smoothly and risk appetite returns, the VIX could drop back to 16. Lucas: That's the risk. If the VIX drops back below 16, those calls could lose most of their value. But the VVIX divergence gives you a probabilistic edge — not a guarantee. You manage it with position size and stops. Luna: And that's really the theme of this episode: using the VVIX as a leading indicator for VIX moves, especially when the VIX is at a level like 17 that's not obviously extreme. Lucas: Exactly. Most traders focus on the VIX level alone. But the VVIX tells you whether that level is stable or about to change. And right now, it's telling you change is coming. Luna: You know, a lot of the tools we talk about here come from hours of watching the tape and testing ideas. And this show exists because we're able to spend that time. Lucas: Yeah, and we keep it ad-free because listeners chip in. If these conversations have helped you think about a trade or a strategy differently, a couple of dollars a month genuinely makes a difference. Luna: It really does. It's at buy me a coffee dot com slash fexingo. No pressure — but it's what keeps the show going and lets us keep drilling into these specific setups. Lucas: Alright. Back to the vol trade. One thing I want to highlight is that the vix vvix divergence is especially powerful when the VIX is in the 16 to 19 range. Below 15, the VVIX tends to be noisy. Above 20, the VIX itself is already screaming. But in this middle zone, the VVIX is your best early warning system. Luna: And with the Fed decision coming up at the end of July, we've got a natural catalyst to watch. The VVIX will probably stay elevated until then. Lucas: Right. So if you're a day trader, you can use this period to set up positions ahead of the event. Buy the VIX call spread, sell the VIX put spread, or even just trade VIX futures based on the VVIX signal. The key is to have a plan before the move happens. Luna: And to respect that the VIX can still drop. The VVIX spike increases the probability of a move, but it doesn't guarantee direction. It could be higher vol to the upside or the downside. Lucas: Exactly. The VVIX doesn't tell you direction — it tells you magnitude. That's why you need a directional bias from other signals, like the small-cap divergence or the Fed odds. Combine the two, and you've got a high-probability setup. Luna: So to sum up: VIX at 17.40, VVIX at 95 and diverging. The market is pricing in a move, likely driven by Fed uncertainty and small-cap weakness. Trade it with calls or call spreads, but manage risk because the range could still hold. Lucas: That's the playbook for the next couple of weeks. We'll keep an eye on the VVIX level — if it breaks above 100, that's an even stronger signal. If it drops back below 90, the divergence is fading. Luna: Let's see how it plays out. Thanks for being here.