Latest / The Day Trading Podcast with Fexingo: Active Trading, Charts, and Short-Term Market Strategy / How Day Traders Read the VVIX 104 Level for Portfolio Hedging
Transcript
- Lucas: The VVIX closed above 104 yesterday. That's the second time in two weeks it's broken that level, and it's got me watching the hedging flows more closely than I have in months. Luna: For listeners who don't live in the vol complex full-time — VVIX is the volatility of the VIX, right? So when it spikes, it means options on the VIX itself are getting expensive. Lucas: Exactly. It's the VIX of the VIX. And when it climbs above 100, you're seeing real fear about a volatility spike — not just the VIX level itself, but the uncertainty around how fast vol could move. Yesterday it hit 104.87, up more than 10 percent over five days. Luna: And the VIX itself is only at 18.77. That's elevated, but not screaming panic. So we've got this divergence: VIX moderate, VVIX hot. Lucas: Right. Market's not melting down. S&P 500 is at 7,458, down maybe 0.8 percent on the week. The NASDAQ's off a bit more, 1.4 percent. But the options market is pricing in a bigger chance of a tail event. That's the kind of signal day traders can use. Luna: What's the trade here? If you're a momentum trader, this looks like a warning signal. If you're a mean-reversion trader, maybe it's a fade. Lucas: I'd split it into two camps. First: if you're holding a net long portfolio — even if it's just overnight swing positions — this is a hedge signal. VIX calls or put spreads become worth the premium. The VVIX tells you that VIX premium is likely to expand if something breaks. So buying a VIX call spread, say the 20/25 strike for a month out, is a cheap insurance policy. Luna: Cheap is relative. With VVIX at 104, that premium is higher than it was two weeks ago when it was below 95. Lucas: Right, you're paying up. But you're paying up because the market is saying the probability of a vol spike has increased. You don't have to hedge the whole portfolio. Even a small notional hedge — 1 to 2 percent of portfolio value in premium — can offset a drawdown if the VIX rips to 25 or 30. Luna: Second camp? Lucas: Second camp is the pure vol trader. When VVIX gets this extended, it often precedes a mean reversion in vol itself. If you think the VIX is going to stay range-bound — say 16 to 20 — you could sell VIX call spreads. Collect premium as the VIX fails to breach 20. But you're fighting the VVIX signal, which is saying the market expects something bigger. Luna: So you'd lean toward the hedge camp right now? Lucas: I am. I'd rather be slightly long vol via cheap upside VIX calls than be short vol against a VVIX at 104. The risk-reward isn't symmetrical. That said, you have to be surgical. Don't just buy a VIX call and sit on it. Look at the term structure — the VIX futures curve has flattened quite a bit. The front month is at 18.8, second month at 19.2. That's a very small contango. When the curve flattens, the roll cost of holding VIX futures is low, but options are still pricing in tail risk. Luna: Speaking of tail risk, there's a lot of noise right now. Dallas Fed President Logan came out saying rates need to go modestly higher. That's not a market-moving statement by itself, but it adds to the hawkish narrative. And then you have the WarshGPT story — the Fed is apparently experimenting with ai assisted communication. That's a wildcard. Lucas: Yeah, that headline caught my eye too. 'WarshGPT' — basically the Fed is using a language model trained on Kevin Warsh's old speeches to simulate how the market might react to different FOMC statements. It's a fascinating development, but for traders, it means the Fed's communication style could become even more data-driven and less predictable. That feeds into vol uncertainty. Luna: And then there's the India IPO frenzy. The biggest IPO this year — I think it was a renewable energy company — pulled in $31 billion in bids. That's institutional demand spilling over from a hot market. It's not a direct vol catalyst for the S&P, but it shows global risk appetite is still very strong. Lucas: Risk appetite plus Fed uncertainty plus a VVIX at 104. That's a volatile cocktail. For day traders, the playbook is: stay nimble, don't fight the vol signal unless you have a strong edge, and consider hedging if you carry size overnight. Luna: I want to get specific on the hedge structure. Say I have a $500,000 long portfolio of large-cap tech. How do I hedge that with VIX options? Lucas: Good question. You don't want to go in with a one-to-one notional hedge — that's overkill and expensive. A typical rule of thumb is to hedge 5 to 10 percent of your portfolio's value with VIX calls. So for $500k, you might buy 10 to 20 VIX call options at the 20 strike for the next month. Each contract controls 100 times the VIX, so 10 contracts at $2.50 premium would cost $2,500. That's 0.5 percent of your portfolio. If the VIX jumps to 30, those calls could be worth $10,000 or more, offsetting some of the drawdown in your longs. Luna: What about put spreads? Some traders prefer those because they cap the cost. Lucas: Put spreads on the S&P itself are another approach. For example, buy the 7,300 put and sell the 7,200 put on the S&P 500 index. That's a defined-risk bearish bet. But VIX options are more direct for pure vol exposure. The key is to not over-hedge and to accept that the premium is the cost of insurance. If nothing happens, you lose the premium, but your portfolio is intact. Luna: And if the VIX spikes, you're glad you paid it. Lucas: Exactly. Let's talk about the exit. If you buy VIX calls and the VIX doesn't move, you have to decide when to cut. I'd set a rule: if the VIX stays below 20 for a full week and the VVIX drops back below 100, I'd close the hedge and take the loss. No point holding through time decay. Luna: One more question: what about using VIX futures instead of options? The contango is small, so the roll isn't punishing. Lucas: Futures give you pure directional exposure with no time decay, but they also have unlimited downside if you're short. For hedging, I prefer options because the loss is capped. You're buying insurance, not making a directional bet. Futures can be used, but you have to be more active in managing the roll. Luna: Good distinction. So to wrap the strategy piece: watch the VVIX as a leading indicator for VIX movement. When it's above 100, consider hedging longs. Use VIX call spreads or index put spreads, sized modestly, and have an exit plan. Lucas: Exactly. And keep an eye on the VIX term structure. If the front-month futures start trading above the second month — backwardation — that's a more urgent signal. Right now it's flat, so the market is uncertain but not panicked. Luna: Speaking of the show, something I've been thinking about: a lot of our listeners have told us these strategy discussions have actually changed how they think about risk in their own accounts. That's not something you hear every day. Lucas: That's really gratifying. And it's also the reason we do this without ads. The show stays clean because a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo. That's literally what funds making this many episodes possible. No sponsors, no agenda. Luna: Yeah, it's a small group, but it keeps the lights on and lets us talk about whatever we think is actually useful. So if you've gotten value from the episodes, that's the way to support it. No pressure, just an honest note. Lucas: Back to the markets. One thing I haven't mentioned yet is the VIX itself vs. the VVIX. Historically, when the VIX is below 20 but the VVIX is above 100, it often precedes a vol event within the next two to four weeks. Not always, but the signal is worth respecting. Luna: It's like the market is holding its breath. Everyone's waiting for the next catalyst — could be a Fed surprise, a geopolitical event, or even a big earnings miss. And the options market is pricing in that possibility. Lucas: Right. And day traders can use that. If you're trading intraday, you can fade the VIX intraday moves if they overextend. For example, if the VIX gaps up 5% in the morning on no news, it often reverts by the close. The VVIX level gives you confidence that the tail risk is real, but not imminent. Luna: So you'd sell the VIX spike intraday? Lucas: Cautiously, yes. But only if the VIX is above its 20-day moving average and the VVIX is above 100. The divergence tells you the fear is elevated but not necessarily breaking. If the VIX spikes to 20 intraday, I'd look for a fade back to 18.5 or so. But if the VIX breaks 20 with conviction, you have to adjust — the signal changes. Luna: Let's look at the numbers from this week. The VIX opened around 17.5 on Monday, closed at 18.77 on Friday. VVIX opened around 95, closed at 104.87. So the vol of vol increased much more sharply. That divergence is the story. Lucas: Absolutely. And that's what I'd encourage listeners to track. Don't just look at the VIX. Look at the VIX futures curve and the VVIX. They give you a three-dimensional view of what the options market is pricing in. The VIX level alone can be misleading. Luna: What are you watching next week for a potential trigger? Lucas: Fed speakers are always a risk. Logan's comments this week were modestly hawkish, but if someone like Waller or Bowman comes out with a stronger stance, that could move the VIX. Also, earnings from Netflix and Alphabet next week — if they miss, tech could take a hit, and that would drag the broader market. That's a vol event waiting to happen. Luna: So the play: hedge some, stay liquid, and watch the VIX for a break of 20. Lucas: That's the plan. And if you're not hedging, at least be aware that the risk-reward favors being smaller than usual. The VVIX is telling you something — listen to it.