Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / How the VVIX Reveals Hidden Market Fear Beneath Calm Markets
Transcript
- Lucas: The VIX is at 15.32, down almost 8 percent in the last five days. By that measure, the market looks pretty relaxed. But the VVIX — the index that measures the volatility of the VIX itself — is sitting at 86. That's not screaming panic, but it's not complacent either. Luna: So the VIX is saying 'all clear,' but the VVIX is saying 'I'm not so sure.' I've seen that divergence before, but it's worth digging into what it actually means for someone managing money right now. Lucas: Exactly. The VIX tracks implied volatility on S&P 500 options — basically, how much the market expects the index to swing over the next thirty days. The VVIX tracks implied volatility on VIX options — it's a measure of how much traders expect the VIX itself to swing. So when the VIX is low but the VVIX is elevated, it means options market participants are pricing in the possibility that fear could spike quickly, even if current conditions feel stable. Luna: And we saw that kind of spike in early 2020 and in 2022. The VIX can go from 15 to 40 almost overnight. The VVIX basically says 'I remember that, and I'm not fully trusting this calm.' Lucas: Right. And the level matters. The VVIX has been hanging around the mid-80s to low-90s for most of this year. Back in 2017, when the VIX was similarly low — around 10 — the VVIX was often below 70. That was real complacency. What we have now is more like cautious calm. Traders aren't panicking, but they're paying up for protection against a volatility spike. Luna: How does that square with what we're seeing in other parts of the market? The Russell 2000 is up 1.7 percent in five days, the yield curve is steepening — the 10-year versus 2-year spread is at 47 basis points — and real GDP growth just came in at 1.6 percent annualized. It's not a booming economy, but it's not falling apart either. Lucas: That's the interesting tension. The macro data is okay, but not great. The yield curve steepening we've talked about before — that's usually a sign that growth expectations are rising, or at least that the Fed isn't going to tighten further. And the small-cap rally suggests money is rotating out of the mega-cap tech names that had such a huge run. That's a healthy shift, in theory. Luna: But the VVIX says there's still an undercurrent of anxiety. So what's worrying options traders specifically? Is it geopolitics, inflation, something else? Lucas: I think it's a few things. First, the inflation narrative is still unresolved. We had a spike in CPI earlier this year, and Fed Governor Bowman just warned against hiking rates again — but the market isn't sure if that's the last word. Second, the VVIX tends to stay elevated when there's event risk on the horizon — like a Fed meeting, an election, or a big earnings season. We've got all three coming up. And third, the options market is pricing in the possibility that the small-cap rally could reverse or that the big tech names could correct further. Luna: So the VVIX is like a fear of fear gauge. And right now, it's saying there's more fear about future fear than about the current state of things. Lucas: That's a great way to put it. And for an investor, the practical question is: do you act on that signal? If you're a long-term holder, probably not. But if you're managing tail risk, the elevated VVIX tells you that options on the VIX are expensive — which means hedging via VIX calls is costly. Some traders might instead use put spreads on the S&P 500 or directly buy VVIX futures if they want exposure to a volatility spike. Luna: And for someone who's just in a 401k, does any of this matter? Or is it really just for the derivatives crowd? Lucas: I'd say it matters as a barometer. If the VVIX were below 70, I'd be more comfortable that the rally has legs. At 86, I'd keep some cash on hand and maybe trim positions that have run up a lot — especially in small caps or speculative areas. It's not a sell signal, but it's a yellow flag. The market is calm, but the plumbing suggests that calm could break. Luna: That aligns with something I've been reading — the skew in S&P 500 options is still tilted toward puts. That's another way of seeing the same thing: people are buying protection, even if spot volatility is low. Lucas: Exactly. The put skew — the implied volatility of out-of-the-money puts relative to calls — has been elevated for months. When you combine that with the VVIX, you get a consistent picture: the market is pricing in a non-zero chance of a tail event, even if the base case is a slow grind higher. Luna: So if the VIX is the temperature, the VVIX is the thermostat. And right now, the thermostat is set a little higher than the temperature reading. Lucas: I'm using that analogy. Look, I think the key takeaway for our listeners is that the VIX alone can be misleading. In late 2017, the VIX was in single digits and everyone felt invincible — then February 2018 happened. The VVIX was actually already creeping up before that crash. It's not a perfect predictor, but it's a useful second opinion. Luna: And right now, that second opinion is saying 'proceed with caution.' Not panic, just don't get too comfortable. Lucas: Yeah. And I think that's a healthy mindset for this environment. The economy is growing slowly, the yield curve is steepening, small caps are leading — all that is constructive. But the VVIX is telling us the market hasn't fully shaken off its anxiety. And maybe that's okay. Maybe a little fear is what keeps the bull market from getting too frothy. Luna: On that note — and this ties into what we're talking about — I want to mention something briefly. If these kinds of conversations have helped you think about risk or portfolio decisions differently, we just want you to know that a small group of listeners supports this show through Buy Me a Coffee. It's at buy me a coffee dot com slash fexingo. That's what keeps us ad-free and able to do deep dives like this. No pressure, just putting it out there. Lucas: Yeah, and we really appreciate those who do. It makes a difference. Anyway, back to the VVIX — one last point I think is worth making. The VVIX also has implications for the so-called 'volatility risk premium.' That's the difference between implied volatility and realized volatility. When the VVIX is elevated, implied volatility is relatively high compared to what actually happens. That can create opportunities for strategies that sell volatility, but it's risky because the VVIX is saying that volatility could expand sharply. Luna: So the VVIX is really the 'uncertainty about uncertainty' metric. It's meta-fear. Lucas: Exactly. And I think that's the right note to end on. In a market that's grinding higher but with a lot of crosscurrents — the yield curve, small caps, inflation debates — the VVIX is a reminder that the easy gains might not be ahead. But it's not a reason to hide in cash, either. It's a reason to be deliberate. Luna: Deliberate and diversified. Thanks, Lucas. That's all for this episode of The Bear Market Podcast. We'll be back soon with another angle. Lucas: Take care, everyone.