Latest / The Day Trading Podcast with Fexingo: Active Trading, Charts, and Short-Term Market Strategy / Reading the VIX 20 Signal After a Divided Fed
Transcript
- Lucas: So the Fed just gave us a split decision today. Rates unchanged, but three members voted to hike. That's a bigger deal than the hold itself for active traders. Luna: Right, three dissenters is a lot. Usually you get maybe one, or none. So the market's trying to figure out if this is a warning shot. Lucas: Exactly. And the VIX reacted immediately — it touched 21.10 intraday and settled at 20.66. That's up 10.5 percent from last week. The VIX hasn't closed above 20 since early June. Luna: And the VVIX is at 109. So options on the VIX are pricing in a lot of volatility of volatility. That's a classic signal for range expansion. Lucas: Yeah, the VVIX above 105 usually means traders expect bigger swings ahead. Today's move confirms that the market didn't fully price in the hawkish dissent. The statement itself was pretty balanced, but the votes tell a different story. Luna: I mean, we just had that headline: 'Divided Fed holds interest rates steady, but three members voted to hike.' That's a strong signal. For day traders, what does that mean for tomorrow's open? Lucas: Well, first, look at the VIX levels. 20 is a psychological level. If it opens above 21, that's a confirmed panic bid. But if it opens around 19.5, that's a fade. I'd watch the overnight index futures — S&P 500 futures are already down about 0.8 percent, so the VIX might gap up. Luna: So if the VIX gaps above 21, you'd look to sell into strength? Or buy protection? Lucas: If it gaps above 21, I'd be cautious buying into that spike. The VIX tends to revert to the mean within a few days after a Fed event. But with three dissenters, the mean might be higher than usual. The long-term average is about 15.5. But after a split vote like this, we could see a new support level around 18 or 19. Luna: So you're saying the VIX has a higher floor now? Because the market knows there's pressure to hike. Lucas: Exactly. The dissent tells us that the hawks are serious. And with inflation still above 3 percent, according to the latest CPI, the next meeting in September becomes a live risk. So the VIX shouldn't collapse back to 14 anytime soon. Luna: What about the VVIX? 109 is high, but not extreme. We've seen it above 130 during the regional banking crisis. Lucas: Right. 109 is elevated but not panic. It tells options sellers to demand higher premiums. So if you're a day trader selling options, you want to be patient. A VVIX above 100 means you can collect more premium, but the swings are bigger. Position size down. Luna: So maybe sell put spreads on the S&P 500 at 15 delta, but keep it small. Lucas: Yes, but wait for a spike. If the VIX opens above 21, then around 10:30 AM, if it settles back below 20, that's a mean reversion trade. You can sell VIX futures or buy puts on VIX. But that's a scalp, not a hold. The VIX can stay elevated for days. Luna: Now, the Nasdaq — down 2.8 percent in five days, much worse than the S&P. The VIX and the Nasdaq are inversely correlated, so that makes sense. But today's Fed news hit growth stocks harder. Lucas: Yeah, the Nasdaq is more sensitive to rate expectations. With three dissenters, the two-year Treasury yield spiked about 5 basis points. That pressures high-duration stocks. So day traders should watch the QQQ vs. SPY relative strength. If QQQ underperforms, that confirms the hawkish regime. Luna: Okay, so concretely: if the VIX opens at 20.66 or higher, what's your first trade tomorrow? Lucas: I'd look to short VIX futures if it spikes above 21.20 in the first 30 minutes, targeting a move back to 19.80. But I'd use a stop at 21.40. That's a trade with a 1:3 risk-reward. And I'd size it at 50 percent of normal due to the VVIX being high. Luna: And if the VIX opens below 20, say 19.5? Lucas: Then I'd be a buyer of protection. That's a trap — the market is ignoring the dissent. I'd buy a VIX call spread, maybe the 21/23 call spread for a debit, targeting a move to 22. Because the dissent is a real risk that could surface within a week. Luna: So either way, you're trading the VIX, not the underlying. That's a pretty clean setup. Lucas: Exactly. The VIX is the pure expression of uncertainty. And today's Fed decision—and the split vote—created a clear uncertainty event. You don't need to guess which stock benefits. You just trade the volatility. Luna: It's interesting, because a lot of day traders might just look at the rate hold and think 'status quo, buy the dip.' But the dissent is a hidden signal. Lucas: That's where the edge is. Most retail traders see 'rates unchanged' and go long. But the three dissenting votes say the path is higher. So the market may sell off as it reprices September odds. The CME FedWatch tool is already showing a 45 percent chance of a hike in September, up from 35 percent yesterday. Luna: Right, so the VIX at 20 is maybe not high enough if a hike is that likely. Lucas: Potentially. That's why I'd lean toward buying volatility if the VIX drops. But if it stays around 20, you have to be patient. The VIX tends to front-run events. It might rally into the next week as more analysts digest the dissent. Luna: That makes sense. So for tomorrow, the key is the VIX 20 level and the VIX 21 level. And the VVIX 109 tells us to trade smaller. Lucas: Bingo. And speaking of trading smaller, quick honest thing: this podcast stays ad-free because a few listeners chip in monthly. If our conversations have helped you think about a trade or a decision differently, you can support us at buy me a coffee dot com slash fexingo. No pressure, just if it's useful. Luna: Yeah, it truly does keep the lights on. And we love doing it. So thanks to those who already do. Lucas: Alright, back to the VIX. So the bottom line: the Fed's split vote is a regime clue. Trade the VIX, respect the VVIX, and expect more range expansion. By the end of the week, we could see VIX test 22 or fall back to 18. Either way, stay nimble. Luna: And position size accordingly. Great stuff. Thanks, Lucas. Lucas: Thanks, Luna. See everyone at the open.