Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / Why the VIX at 16 Lies About Market Risk
Transcript
- Lucas: So the VIX closed yesterday at 16.13 — that is low by almost any historical standard, certainly lower than the 20-year median around 18. And if you just saw that number, you'd think markets are fine, maybe even complacent. But here's the thing — the VVIX, which is the volatility of the VIX itself, is at 87.9 and it's been climbing. Luna: Right. So the VIX is telling us expected volatility is low, but the VVIX is saying that expectation is itself volatile — those two are sending opposite signals. Lucas: Exactly. And on a milestone episode — this is number 100 of the Bear Market Podcast — I think that's the perfect paradox to dig into. Because if you've been listening since the start, you know we don't just look at the headline number. Luna: Yeah, this is a good one. And before we get into the mechanics — I'll just say, if today's conversation helps you think about your portfolio differently, we keep this show ad-free thanks to listeners who chip in at buy me a coffee dot com slash fexingo. It's genuinely just a coffee — no perks, no tiers. Lucas: Absolutely. And for a hundred episodes, that support has been what keeps us going — no sponsors, no pressure. So thank you. Now back to the VIX paradox. Luna: So give me the specifics on this VVIX number — what does 87.9 actually mean? Lucas: The VVIX is a measure of the implied volatility of VIX options — essentially, how much uncertainty there is about where the VIX will be in 30 days. Historically, when the VVIX is above 80 while the VIX is below 17, it often precedes a sharp move in the broader market. You saw this in late 2024 before the August sell-off. Luna: So it's like the market is pricing in a 'maybe something happens' — but doesn't know what. That's a tail-risk signal. Lucas: Exactly. And what's interesting is that the S&P 500 is at 7,504 — basically flat over the past five days — and the yield curve spread is now 36 basis points, which is the widest in months. That steepening is usually a sign that growth expectations are shifting. Luna: So the VIX says chill, the VVIX says be ready, and the yield curve says growth is reaccelerating. That's a lot of conflicting data for a dip-buyer to parse. Lucas: It is. And the typical retail takeaway is 'VIX is low, buy the dip.' But when the VVIX is elevated, that playbook has historically been dangerous. I looked at every instance since 2010 where the VIX was below 17 and the VVIX above 85 — there have been about a dozen. In 9 of those, the S&P 500 was lower one month later. Luna: Nine out of twelve — that's a 75 percent hit rate. So the VVIX is basically a leading indicator that the VIX is giving a false sense of security. Lucas: Right. And the mechanism is pretty straightforward. Option market makers are the ones who set the VIX level by trading S&P 500 options. When they see increased demand for out-of-the-money puts — tail hedges — they push up the implied volatility of those options, which raises the VIX. But if that demand is concentrated far out of the money, the VIX might only tick up a little. Meanwhile, the VVIX captures the cost of hedging the VIX itself, which is more sensitive to those tail risks. Luna: So the VIX could be at 16 while the market is actually pricing in a crash risk — it's just that the probability of a crash is higher than what the VIX suggests, because the VIX is a weighted average across all strikes. Lucas: Exactly. And that's the nuance. The VIX at 16 is an average of options from slightly in-the-money to far out-of-the-money. If the tail risk is concentrated in the far OTM puts, the VIX might only be a couple of points higher than it would be otherwise, but the VVIX reacts more strongly because those tail hedges are more expensive relative to the VIX level. Luna: So what should a listener do with this? If they're sitting on cash and thinking about buying the dip, what's the concrete takeaway? Lucas: I'd say two things. One: wait. Don't feel pressured to deploy cash just because the VIX is low. The VVIX is telling you that the next move could be violent. Two: if you do want to buy, consider using a laddered approach — buy a small position now, and then if the VIX spikes to 20 or 25, add more. That way you're not all-in at a false low. Luna: And what about the yield curve steepening? Does that change the calculus? The 10-year at 4.48, the 2-year at 4.13 — that 36 basis point spread is the widest since the inversion started unwinding last year. Lucas: It does. A steepening yield curve is typically bullish for equities, especially cyclical sectors. So the macro backdrop is not necessarily bearish — it could be that the VVIX is just reflecting uncertainty about the pace of growth. But the combination of a low VIX and a high VVIX is historically more common before drawdowns than before rallies. Luna: So the VIX is lying, but maybe not in a bearish way — it's just not telling the whole truth. Lucas: Exactly right. And that's really the lesson for episode 100. We've talked a lot on this show about not being fooled by the VIX — episodes 92, 95, 99 all touched on variations of this. But I think the VVIX adds a dimension that most investors ignore. It's like having a second opinion on the radar. Luna: I want to look at one more thing: the VVIX term structure. Is it in contango like the VIX usually is, or is it backwardated? Lucas: Great question. The VVIX is actually in a mild contango — the futures are slightly above spot. That means the market expects the VVIX to come down over the next month, which is consistent with a low VIX environment. But the level of the VVIX futures is still elevated relative to history — the one-month VVIX future is around 90. So even though the curve is sloping down, it's starting from a high base. Luna: So the message is: maybe the VIX ticks up a bit, but not a crash — but the VVIX is pricing in a higher chance of a spike in volatility than the VIX alone suggests. Lucas: Precisely. And if we look at the options market for the S&P 500 itself, the put-call ratio has been creeping up — it's now at 1.15, which is above the 20-day average of 1.02. That's another sign that institutional investors are hedging more than normal, even though the VIX is low. Luna: So the smart money is preparing for something, but the VIX is still low. That divergence is exactly what you'd expect if tail risk is rising. Lucas: Yes. And the question everyone should be asking is: what could trigger that tail risk? The yield curve steepening is one candidate — it could signal that the Fed is behind the curve on inflation, or that growth is accelerating too fast. But it could also be a global event — we've seen geopolitical tensions simmering. The VVIX doesn't tell you what the trigger is, just that the market is paying up for protection. Luna: Alright, so final thought for episode 100: if you're a dip buyer, don't trust the VIX at 16. Look at the VVIX instead. If it's above 85, be cautious. If it's below 75, then the low VIX is probably real. Lucas: I'd add one more thing: look at the yield curve too. If the curve is steepening and the VVIX is elevated, that's historically been a mix that resolves with a moderate correction, not a crash. So it's not time to panic — it's time to be deliberate.