Latest / The Day Trading Podcast with Fexingo: Active Trading, Charts, and Short-Term Market Strategy / How Day Traders Read the VIX Drop Below 16
Transcript
- Lucas: So the VIX closed below sixteen on Friday, first time since, I think, early June. And that number, 15.99, is worth sitting with for a sec. Luna: It feels like the market is basically saying, nothing to see here. The S&P is up one percent on the week, the Nasdaq up nearly two. Everyone's calm. Lucas: Exactly. And that's the setup that can actually be the most dangerous for day traders. Low VIX doesn't mean no moves — it means the moves that do happen hit harder because no one's positioned for them. Luna: Right, and the VVIX is still at 91.64, down nine percent from last week but still well above the VIX. That gap is telling you something. Lucas: Yeah, the volatility of volatility is not priced for calm. It's like the market is holding its breath. So when you see VIX below sixteen but VVIX above ninety, you've got this tension between spot complacency and forward anxiety. Luna: How do you actually trade that? I mean, you can't just say, be careful. What's the concrete move? Lucas: First, you tighten your size. If you usually risk one percent of your account per trade, you cut it to half a percent on days like this. Because the average daily range can compress, but the tail is fatter. You're giving up a bit of upside to protect against the spike you can't see. Luna: And you pay attention to the time of day, right? Because low VIX mornings can lull you into thinking nothing's going to happen, and then the afternoon hits. Lucas: That happened to me last week. VIX was around 16.5, market looked like a snoozefest, and then at 2 p.m. Eastern, the Nasdaq just rolled over. If you were long from the morning, you gave back everything and then some. Luna: So it's about being ready for regime change intraday, not just daily. Lucas: Exactly. And that's where the front end of the yield curve comes in. A lot of the chatter this week was about the Fed and what happens in September. When traders start paying attention to the front end, it means the short-term rate path is becoming a story again. That can inject volatility into a market that looks calm. Luna: And you mentioned Goldman traders having a record year. How does that fit into this low-vol environment? Lucas: Goldman's trading desks are on pace for a record year, and a lot of that is flow — clients are still active, they're hedging, they're repositioning. Even with low VIX, there's a lot of two-way business. So it's not that volatility is absent, it's that it's not showing up in the index level. Luna: So the opportunity for day traders is in the moves that don't show up in the VIX. Like single stocks reacting to news, or sectors rotating. Lucas: Right. And that's why I like to look at the vvix to vix ratio on days like this. When VVIX is above ninety and VIX is below sixteen, the ratio is elevated. Historically, that's been a warning sign that a vol spike is coming, maybe not tomorrow, but within a couple weeks. Luna: And you've talked before about how that ratio can be a tail-risk gauge. So what's the playbook when you see that? Lucas: You don't necessarily buy puts or go short. You just stay nimble. You take profits quicker, you don't let winners turn into losers, and you make sure your stop losses are actually in the market, not in your head. Luna: And you also keep an eye on things like the IPO market. Clear Street is offering pre ipo access to Databricks, that $188 billion AI giant. That's a sign that risk appetite is still strong, even with low volatility. Lucas: Yeah, that's a good point. When fintechs start giving retail investors pre ipo access to the hottest AI names, it says something about sentiment. It's not a direct trading signal, but it tells you there's demand for risk. Luna: And that demand can keep a market elevated, even when the VIX is low. But it also means there's a lot of speculative froth that could unwind quickly if something breaks. Lucas: Exactly. So on a day like today, with the VIX at 15.99 and the market having had a strong week, my approach is to be a little more defensive. I'm looking for mean-reversion setups in the morning, but I'm not holding anything through the afternoon if I don't have a clear thesis. Luna: You know, it's funny — we talk about this all the time, and a lot of listeners probably think, okay, low VIX, just stay out. But that's not practical. You have to trade. Lucas: Right, and that's why I like to frame it as: low VIX is a speed limit, not a red light. You can drive, you just need to keep the speed down and watch for deer. Luna: And maybe don't text while driving. Or in trading terms, don't overtrade. Lucas: Exactly. And on that note — you know, we put a lot of time into these episodes, and we deliberately don't run ads on the show. It's a choice we made, and we want to keep it that way. If our conversations have helped you think about a trade or a decision differently, and you want to support that, the link is buy me a coffee dot com slash fexingo. No pressure, but it does keep this thing going. Luna: Yeah, and we appreciate every one of you who listens, whether you ever buy a coffee or not. It's just nice to know the show's useful to someone. Lucas: So back to the VIX — I want to give you a concrete example from this past week. On Tuesday, I saw VIX at 16.2 early in the day, and the SPY was up 0.3% in the first hour. I took a long on a momentum name, but I set my stop at just 0.8% below entry, tighter than my usual 1.5%. Luna: And that saved you, because the stock reversed in the afternoon. Lucas: It did. I got stopped out for a small loss, but if I had used my normal stop, I would have given back a lot more. The point is, when VIX is low, the intraday swings can catch you off guard, so you have to adapt your risk parameters. Luna: And you also look at the VIX term structure, don't you? When the front month is below 16 and the back months are higher, that's contango, and it's normal. But if the front month starts to rise above the back months, that's a warning. Lucas: Yeah, that's the inversion signal, and it's rare. Right now we're in contango, which is typical, but the VVIX is telling us that the options market is pricing in more risk than the spot VIX suggests. So I'm watching that term structure like a hawk. Luna: And what about the day ahead? It's a Sunday, but futures are open. Any thoughts on what to watch Monday? Lucas: We've got a quiet economic calendar, but we'll hear more Fed speakers. If any of them sound more hawkish, you could see the front end of the curve move, and that could spark a vol spike. So I'd be ready for anything. Luna: And if the VIX stays below 16, what's your bias? Lucas: I'm neutral to slightly bearish for the next couple weeks. Not because I think the market is going to crash, but because the risk-reward for longs is worse when complacency is high. You're basically selling volatility at a low price if you're buying stocks at these levels. Luna: So you'd rather be a seller of vol than a buyer right now? Lucas: Not on the index level — that's a crowded trade. But in specific names, yeah, I'm more comfortable selling puts on quality companies that I want to own at a lower price, or buying call spreads on names with catalysts. That way I'm collecting premium without taking on unlimited risk. Luna: Makes sense. And for the pure day trader, what's the one takeaway you want listeners to remember? Lucas: When the VIX is below 16, your edge is not in catching big moves — it's in preserving capital for the days when volatility returns. Trade smaller, trade smarter, and don't get complacent just because the market is calm. Luna: And if you want to keep hearing this kind of breakdown, you know where to find us. Lucas: Right. We'll be back tomorrow with another angle. Until then, keep your stops tight and your eyes open.