Latest / The Day Trading Podcast with Fexingo: Active Trading, Charts, and Short-Term Market Strategy / How Day Traders Read the VIX Spike Into a Hawkish Fed
Transcript
- Lucas: So the VIX closes at 18.41 on Friday, up about nine and a half percent over the past five sessions. Meanwhile the VVIX — the index that tracks implied volatility of VIX options — actually ticks down to 89, a slight drop. Luna: That's an interesting divergence. Fear going up in the main gauge, but the options market isn't panicking. Lucas: Exactly. And for a day trader, that gap between the VIX and the VVIX can be a really clean setup. I call it the vix vvix wedge. When the VIX spikes but the VVIX falls — or even stays flat — it's often a signal that the move in the VIX is overdone and likely to reverse. Luna: So you're looking to fade the VIX spike, basically bet that it'll revert back down. Lucas: Right. But not blindly. The wedge works best when it's driven by a specific catalyst that the market may be overreacting to. And this week, we had one: Minneapolis Fed President Neel Kashkari saying on Friday that he expects a rate hike this year. Luna: That's a pretty hawkish comment from someone who's historically been one of the more dovish members. Markets probably weren't positioned for that. Lucas: Exactly. So you get a knee-jerk fear spike. The VIX jumps. But when you look under the hood, the VVIX isn't confirming. That tells me the options market isn't pricing in a sustained panic. It's saying, 'This is a one-off comment, not a regime change.' Luna: And that's your entry signal. What's the actual trade? Are you buying VIX futures, selling them, or using options? Lucas: The cleanest way for a day trader is to short VIX futures or buy a VIX put spread. But you need a clear rule. First, you wait for the wedge to appear — VIX up more than three percent in a day while VVIX is flat or down. Second, you check that the catalyst is a headline, not a structural shift. Kashkari saying 'rate hike' — that's a headline. If it were a CPI print coming in hot, that's structural. Luna: So if the VIX spikes on a macro data release, you'd be more cautious. Lucas: Much more cautious, because data tends to have persistence. Comments from Fed officials get walked back or forgotten. So with the wedge in place and a headline catalyst, I'd enter a short VIX position with a stop if the VIX breaks above 20. That's about nine percent above Friday's close — enough room to avoid getting stopped out on noise, but tight enough to cap the loss if I'm wrong. Luna: And if the trade works, what's the target? Lucas: I'd look for the VIX to retrace back to around the 16.5 to 17 area, which is roughly where it was before Kashkari spoke. That's a move of about eight to ten percent from 18.41. In VIX futures, that could be a nice intraday swing. But you have to be disciplined — the wedge is a short-term signal, not a week-long hold. Luna: Yeah, day trading volatility products can be brutal if you hold overnight. The VIX futures curve can shift and eat your gains. Lucas: Absolutely. This is a one- to three-day trade at most. And you want to see the VIX start to fade within the first few hours of the next trading session. If it doesn't, the setup is invalid and you get out. Luna: So Monday morning, you're watching the VIX open. If it gaps up above 19, are you still shorting? Lucas: No. If it opens above 19, the momentum is too strong. I'd wait for it to fail at a level — maybe reject 19.5 or 20 — and then short on the failure. But ideally, you want the wedge to be confirmed by price action: VIX spikes intraday, VVIX doesn't confirm, and then VIX starts to roll over. That's the sweet spot. Luna: Let's talk about the VVIX level specifically. It's at 89, down a bit. Historically, when the VVIX is below 100 and the VIX is spiking, does that tend to mean the spike fizzles? Lucas: Yes, there's a good track record. When VVIX is below 100, options market makers aren't hedging for a big VIX move. They're complacent. And when the VIX spikes into that complacency, it's often a snap-back. I ran a quick scan of the last two years — every time the VIX closed above 18 with VVIX below 90, the VIX was lower within five trading days in about 70 percent of cases. Luna: Seventy percent is solid. But what about the risk that Kashkari's comment is actually the start of a broader hawkish shift? The Fed's been data-dependent, but if we get another hot inflation print... Lucas: That's the counterargument, and it's valid. But as a day trader, you're not betting on the macro outlook. You're betting on a mean-reversion over a few days. If the macro changes, you take your small loss and move on. The key is keeping the trade size small enough that a stop-out doesn't hurt. Luna: So position sizing is critical here. What's your rule? Lucas: For a setup like this, I risk no more than one percent of my trading account on the trade. If my stop is at 20 on the VIX, I calculate how many futures contracts or options that corresponds to, and size accordingly. It's not about being right — it's about being right enough times with good risk management. Luna: Right. And that's really the core of day trading: edge plus discipline. Lucas: Exactly. One other thing to watch: the VIX term structure. When it's in contango — which it usually is — shorting VIX futures has a positive roll yield. That's another tailwind. Right now, the front-month VIX futures are around 19, while the spot VIX is 18.41. That contango gives you a little buffer. Luna: So you're getting paid to wait for the mean reversion, essentially. Lucas: To some degree. Of course, if the VIX spikes further, that contango can flip to backwardation quickly, and then you're fighting the curve. But as of Friday, it's a friendly setup. Luna: Alright, so let's recap the checklist for listeners. One: VIX spikes on a headline catalyst. Two: VVIX is flat or down, ideally below 100. Three: VIX term structure is in contango. Four: you enter short VIX with a stop at 20. Five: target the 16.5-17 area. Anything else? Lucas: One more: watch for a follow-up headline that could reinforce the catalyst. If Kashkari doubles down on Monday, the wedge could fail. So you have to be ready to adjust. But if he says nothing, or if another Fed official pushes back, that's additional confirmation. Luna: Makes sense. So you're not just watching the charts — you're watching the news flow as well. Lucas: Absolutely. Day trading is about reacting to what the market is pricing in, and news is the fuel. This setup is a nice example of how volatility divergences can give you a probabilistic edge, but only if you respect the risks. Luna: Honestly, if this breakdown of the vix vvix wedge helped you think about a trade differently, maybe it was worth a coffee. You can find us at buy me a coffee dot com slash fexingo. Lucas: Yeah, listener support is what keeps the show ad-free and allows us to dig into these kinds of nuanced setups. No pressure at all — just if you found value. Luna: Exactly. Back to the trade: one nuance I want to add is that the vix vvix wedge works best when the VIX spike is sudden and sharp. A gradual creep up over several days doesn't create the same mispricing. Lucas: Good point. Friday's move was a spike — the VIX jumped from around 17.5 to 18.4 in a matter of hours after Kashkari's comments. That's the kind of velocity that creates the wedge. If it had taken a week to get there, the options market would have had time to adjust. Luna: So speed matters. The faster the VIX moves, the more likely the VVIX lags. Lucas: Exactly. And that's why this setup is particularly tradeable. It's a statistical arbitrage between two related but not perfectly correlated instruments. The VIX measures implied volatility of the S&P 500, the VVIX measures implied volatility of VIX options. They usually move together, but when they diverge sharply, there's an opportunity. Luna: And the divergence is often resolved by the VIX coming back down, not the VVIX going up. Lucas: Historically, yes. Because VVIX tends to be more stable. It's a second-order derivative, so it moves less. So when the VIX spikes and VVIX doesn't follow, it's a signal that the options market sees the spike as noise. Luna: Alright, so Monday we'll be watching. Thanks Lucas. Lucas: Thanks Luna. Good luck out there.