Latest / The Day Trading Podcast with Fexingo: Active Trading, Charts, and Short-Term Market Strategy / How Day Traders Read the August Quiet Tape With the VIX at 15
Transcript
- Lucas: So the VIX is sitting at 15.13, basically flat on the week, but the V-V-I-X is down more than eight percent. For anyone who trades short-term, that divergence is worth paying attention to. Luna: Yeah, that's a big drop in the VVIX. Usually when that happens, it means options traders are pricing in less risk of a vol spike, right? Lucas: Exactly. The VVIX measures the expected volatility of the VIX itself. When it's falling that sharply while the VIX holds steady, the market is basically saying, we're comfortable with this level of fear, and we don't think it's going to jump anytime soon. Lucas: But here's the thing – that comfort can be a setup. We've seen this pattern before where the VVIX gets complacent right before a vol event. So as a day trader, you want to respect the calm, but also have a plan for if it breaks. Luna: What's the tell? How do you know when the calm is about to end? Lucas: The first thing I watch is the small caps. The Russell 2000 is down 1.3 percent on the week, which is more than the S&P's 0.9 percent drop. That relative weakness is often a leading indicator. When small caps start underperforming that consistently, it suggests risk appetite is fading, even if the big indices look stable. Luna: So the small caps are telling you something the S&P isn't. Lucas: Right. And it's not just the index level – it's the breadth. We've had a lot of episodes about small-cap breadth, but today I want to focus on how you actually trade this specific setup: a steady VIX, a falling VVIX, and small caps lagging. Lucas: The play isn't to short the market just because the Russell is weak. It's to be more selective, tighten your risk, and watch for confirmation of a broader risk-off move. Luna: Can you give us a concrete example of what you mean by confirmation? Lucas: Sure. Let's say you're watching a stock that's been holding up well, like a regional bank. There's been chatter this week about Wells Fargo and Citigroup potentially buying a smaller bank. That kind of M&A speculation can keep the sector bid. But if the Russell breaks below a key level, say the 3,000 mark, and the VIX starts ticking up, then you want to step aside and wait. Luna: So the thesis is, don't fight the tape if the internals are deteriorating. Lucas: Exactly. And this is where the VVIX drop becomes useful. When the VVIX is falling, it's telling you that the options market isn't hedging for a spike. That means the market is complacent. As a day trader, you can use that as a contrary indicator – if the VVIX starts to turn up while the VIX is still low, that's your early warning signal to cut risk. Lucas: I've been doing this for a while, and the pattern I've seen is that the VVIX often leads the VIX by a few hours or even a day. So if you see that divergence, it's time to tighten up your stops. Luna: That makes sense. And it's interesting because the VVIX is down so much – 8 percent – that's a big move. It suggests the options market is really not expecting any drama. Lucas: Right, and that's the kind of complacency that can lead to surprises. But you don't want to just fade it blindly. You need to have a specific trigger. For me, it's the VIX breaking above its recent range, say above 16, or the VVIX reversing and closing higher on the day. Lucas: If either of those happens, I'll look to take off any remaining positions and maybe even look for a short on a weak stock. But if the VIX holds below 15.5 and the VVIX keeps dropping, you can still trade the range, just with smaller size. Luna: So it's about adapting your risk to what the volatility signals are telling you. Lucas: Exactly. And this is a discipline thing. In a quiet tape like this, the temptation is to force trades because you're bored. But the best day traders I know treat days like this like a fishing trip – you cast a few lines, but you don't pull the boat over for every nibble. Luna: That's a good analogy. And let's talk about the bitcoin market for a second. There was a headline that Kalshi traders think bitcoin will end the year near current levels. That's interesting because bitcoin is a risk asset, and if it's range-bound, it might be confirming the overall calm in risk appetite. Lucas: Yeah, that's a good point. Bitcoin has been pretty quiet, and if the options market there is pricing in a flat year-end, that's another piece of evidence that the market isn't expecting a big move. But again, that can change quickly. As a day trader, you want to be aware of these signals across different asset classes. Lucas: You know, speaking of signals, if today's conversation is giving you a clearer framework for reading the tape, that's exactly what we're here for. These episodes stay free because of listener support, and if you've found value in it, the way to keep that going is a small contribution at buy me a coffee dot com slash fexingo. Luna: Yeah, every little bit helps us keep doing these deep dives. And honestly, if you're getting something useful out of this, it's a way to say thanks. Lucas: Alright, back to the tape. So let's talk about the other side of the VVIX signal – what it means for option selling strategies. Lucas: When the VVIX is falling, the premium you collect from selling options, especially on the VIX itself, gets thinner. So if you're a premium seller, you have to be careful about the risk-reward. You're taking on the tail risk of a vol spike for less compensation. Luna: So you might want to scale back your short VIX strategies when the VVIX is this low. Lucas: Exactly. A lot of traders look at the VIX at 15 and think, oh, it's high relative to the 12s we saw earlier this year, but the VVIX is telling you that the market doesn't see that as a risk. So you have to respect that. I'd rather sell premium when the VVIX is elevated, because that's when you're getting paid for the uncertainty. Luna: That makes sense. So, what about the bank headlines? We mentioned Wells Fargo and Citigroup potentially buying a regional bank. How would you play that as a day trader? Lucas: M&A speculation is tricky for day trading because it can cause big gaps. If you're trading a small regional bank that's a potential target, you might see a spike on the news, but it's hard to get in before that. The safer play is to watch the larger banks like Wells Fargo or Citigroup. If the market believes they're going to do a deal, their stocks might see some upside, but it's not a pure momentum play. Lucas: Honestly, I'd treat those headlines as context rather than a trading signal. The real move is often in the smaller names, and those are too risky for most day traders. Luna: So you'd rather focus on the volatility signals we've been talking about. Lucas: Exactly. The key is to have a framework that tells you when to be aggressive and when to be defensive. This week, with the VVIX dropping and small caps underperforming, I'm leaning defensive. I'm trading smaller size, I'm taking profits faster, and I'm making sure I'm not overstaying my welcome in any position. Lucas: And one more thing – the Nasdaq is down 1.7 percent on the week, which is more than the S&P. That tells me that tech, which has been the leader, is starting to lag. That's another warning sign. When the leaders start to falter, the whole market can follow. Luna: But there are still opportunities, right? You just have to be selective. Lucas: Absolutely. There are always stocks that are moving, even in a quiet tape. You just have to be patient and wait for your setup. For me, that means waiting for a stock that's showing relative strength – like holding its moving average while the market drops – and then buying a breakout on volume. But I'm not going to force it. Luna: So what's your plan for the last week of August? Are you going to trade or just watch? Lucas: I'll trade, but I'm going to be very selective. The end of August is typically low volume, and with this kind of quiet tape, the risk of a false breakout is higher. I'd rather miss a few moves than get caught in a trap. I'm going to keep my size small and my stops tight. Lucas: And I'll be watching that VVIX closely. If it starts to turn up, that's my cue to step back even further. Luna: That's a solid approach. Thanks, Lucas, for breaking this down. It's easy to get complacent when the VIX is this low, but you've given us a concrete way to stay on top of the risk. Lucas: Glad to help. The bottom line is, don't let a quiet tape lull you into a false sense of security. Use the VVIX as your early warning system, watch the small caps for confirmation, and keep your risk in check. The market can turn in an instant, and the best traders are the ones who are prepared for that.