Latest / The Day Trading Podcast with Fexingo: Active Trading, Charts, and Short-Term Market Strategy / How Day Traders Are Using the VVIX Term Structure
Transcript
- Lucas: So the VIX is at 16.19 this morning, down more than 27 percent over the last five days. That's a pretty aggressive compression. Luna: Yeah, and the VVIX — the VIX of the VIX — is at 87.58, down about 8.6 percent over the same period. So the VIX dropped faster than the VVIX. Lucas: Right. And that's actually the setup I want to talk about today. The VVIX term structure — the shape of VVIX futures across expirations — can tell us things about volatility of volatility that the VIX alone doesn't capture. Luna: I've seen traders talk about the VIX term structure a lot, but the VVIX term structure feels less common. What are you seeing? Lucas: So think of it like this. The VIX term structure tells you what the market expects for implied volatility over the next 30 days. The VVIX term structure tells you what it expects for the volatility of that implied volatility. When the VVIX front-month futures are trading well above the deferred months, that's a steep contango in VVIX. It usually means traders are pricing in a lot of uncertainty about near-term vol. Luna: And when it flattens or goes into backwardation? Lucas: That's rarer, but it can signal a vol of vol event — like a crash or a huge gamma squeeze. Right now, with the VIX collapsing but the VVIX not falling as hard, the term structure is actually steepening in the front end. The market is saying: 'We're calm now, but we're not sure the calm lasts.' Luna: So the VVIX term structure is like a canary for a potential vol spike. If it steepens while VIX drops, that's a warning. Lucas: Exactly. And for day traders, that's actionable. Look at the Russell 2000 — it's up 2.7 percent over the last five days. Small caps ripping while VIX drops. That's a classic risk-on move. But the VVIX term structure is saying the comfort might be fragile. Luna: So how would you trade that? Buy puts on SPY? Or something more nuanced? Lucas: I'd look at intraday VVIX spikes. When the VVIX itself — not just the term structure — jumps more than 3 percent in a session, it often precedes a VIX spike by one to three days. So if I'm day trading and I see VVIX spike early in the session, I might fade the risk-on move. Sell strength in small caps, buy protection in SPX options. Luna: Interesting. So the VVIX spike is a leading indicator for VIX. Lucas: It's not perfect, but it has a decent track record. The other thing is the VVIX term structure's slope. When the front-month VVIX futures are more than 10 percent above the second-month, that's a historically high level. It's happened about a dozen times in the last five years, and in eight of those cases, the VIX was higher two weeks later. Luna: Eight out of twelve. That's a good batting average for a volatility signal. Lucas: And right now, as of this morning, the front-month VVIX is trading at about 91, the second-month at 84. That's roughly an 8.3 percent premium. Not quite at the 10 percent trigger, but getting there. Luna: So it's on watch. If the premium widens further, that's a signal to prepare for a vol event. Lucas: Exactly. And the nice thing is you don't need a PhD in options to use this. You just need to look at the VVIX futures curve on your platform — most brokers have it — and note the percentage difference between the front two months. Luna: Let's talk about how to actually set that up. What chart or indicator do you pull up? Lucas: I use the CBOE's VVIX index itself — ticker VVIX — and overlay the VVIX futures term structure. Some platforms like ThinkorSwim have a 'VVIX Term Structure' study. If not, you can manually check the futures prices. I also watch the VVIX/VIX ratio. When that ratio spikes above 5.5, it's another warning. Luna: And what's the ratio at today? Lucas: Roughly 5.4. VVIX at 87.58 divided by VIX at 16.19. So again, just below the trigger. Luna: So we're in a zone where multiple vol of vol metrics are flashing yellow but not red. That's a good setup for being ready but not overreacting. Lucas: Exactly. And that's the kind of nuance day traders can use. You're not just buying or selling based on price action. You're seeing the market's own uncertainty about its uncertainty. Luna: It's like reading the market's anxiety level. And right now it's a little anxious beneath the calm surface. Lucas: Right. And that's why I wanted to share this — because most people only look at VIX. But the VVIX term structure gives you a second opinion on whether the calm is real or fragile. Luna: I think a lot of our listeners appreciate that kind of deeper insight. And you know, it's conversations like this that remind me why we do this show ad-free. Lucas: Totally. We keep the podcast free of sponsors because we want to talk about what actually matters for traders, not what a vendor wants us to push. If that kind of independence is valuable to you, the best way to support it is a small contribution at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a simple way to keep the lights on and the content honest. No pressure, just if you find the show useful. Lucas: So back to the VVIX. Let's talk about one more specific setup I've been using. Luna: Let's hear it. Lucas: When the VVIX term structure steepens sharply intraday — say the front-month jumps 5 percent in an hour — I look for a VIX spike within the next two sessions. Often it's a buying opportunity for VIX calls or put spreads on SPX. The trade works best if VIX is already low, like now. Luna: So you're buying volatility when it's cheap, using the VVIX as your trigger. Lucas: Exactly. And because VIX is mean-reverting, even a small spike gives you a decent payout if you use options. The key is not to overstay — day trade it. If VIX spikes within two days, take profits. Don't hold for a crash. Luna: Makes sense. And the VVIX term structure helps you avoid false signals. If the steepening is just a temporary blip, the VIX might not react. Lucas: Right. So you want to see the steepening sustained for at least a few hours. If it fades quickly, ignore it. But if it holds through the afternoon, it's a stronger signal. Luna: Let's test this with a recent example. Do you recall a day in the past month where the VVIX term structure steepened and then VIX followed? Lucas: Yeah, about two weeks ago, on June 2, the VVIX front-month spiked from 82 to 89 in one session. The term structure premium went from 6 percent to 12 percent. Two days later, VIX jumped from 14 to 18. That was a textbook setup. Luna: And if you bought VIX calls at the close on June 2, you'd have had a nice gain by June 4. Lucas: Exactly. And that's the kind of edge we're talking about. Not a guarantee, but a probabilistic edge that repeats. Luna: Alright, so to sum up: watch the VVIX term structure, especially the front-month premium over second-month. When it widens past 10 percent, be ready for a VIX spike. And use intraday VVIX spikes as an earlier trigger. Lucas: And keep an eye on the VVIX/VIX ratio above 5.5. All three together give you a high-confidence alert. Luna: Great stuff. That's all for today. Thanks for listening. Lucas: Trade smart, and we'll catch you next time.