Latest / The Day Trading Podcast with Fexingo: Active Trading, Charts, and Short-Term Market Strategy / How the VIX Carry Trade Whipsawed Day Traders This Week
Transcript
- Lucas: Alright, Luna, let's talk about the VIX carry trade — because if you traded this week, you felt it. Luna: Felt it is putting it mildly. The whipsaw was brutal. What exactly is the VIX carry trade, for anyone who hasn't been following it? Lucas: So the VIX carry trade is basically a strategy where you short VIX futures when the term structure is in contango — that is, when future months are priced higher than the spot. You collect the roll yield as those futures converge. It's been a consistent winner for years because contango is the normal state. Lucas: But this week, the structure flipped. The VIX itself jumped from around 16 to 21.51 in five days — that's a 34 percent move. And the VVIX, which is the volatility of the VIX, hit 102. That's a serious regime change. Luna: Right — the VIX carry trade blew up. When the VIX spikes, those short futures positions lose money fast. And because so many systematic strategies are in that trade, the unwinding amplified the move. Lucas: Exactly. The jobs report on Friday was the catalyst. Hot payrolls, wage growth sticky — basically kicked the can on rate cuts further down the road. Chair Warsh has his hands full. Luna: And that hit growth stocks hard. The Nasdaq dropped over 5 percent in five days. The Dow only fell 0.4 percent. That divergence is the whipsaw we're talking about. Lucas: Right, the rotation out of tech into defensives happened fast. But if you were day trading the VIX futures or options on the VIX, you had to adjust your sizing every hour. Lucas: The VVIX at 102 tells me the market expects more spikes ahead. That's not a normal reading — it's in the 90th percentile historically. Luna: So for day traders, what's the play? Are we looking at VIX call spreads? Or is it better to stay in small caps and trade dispersion? Lucas: I think the dispersion play still works, but you have to be picky. The Russell 2000 fell 2.5 percent, which is less than the Nasdaq but more than the Dow. So there's opportunity in individual names that are uncorrelated. Lucas: But I'd also watch the VIX term structure. If we see the front month go into backwardation — where spot is higher than the next month — that's a signal the carry trade is fully unwound, and we might get a bounce. Luna: That's a good point. And speaking of signals — you mentioned the VVIX. How do you use that in real time? Lucas: When the VVIX is above 100, it means options on VIX are pricing in large swings. I'll look at the VIX options skew — if puts are expensive relative to calls, that tells me the market is hedging for more upside volatility. That's a yellow flag for day traders who are net long risk. Luna: So you're saying we should be more defensive until the VVIX comes down? Lucas: Yeah, or at least size down. The carry trade unwind isn't over yet. There's still a lot of leverage in the system. Luna: Honestly, if today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Lucas: We keep the show ad-free, and listener support is what makes that possible. If our conversations about the VIX carry trade or whatever else helped you navigate this week, that's all we ask. Luna: Yeah, it's a small gesture that goes a long way. Now, back to the VIX — what about the VVIX divergence we saw earlier this week? Lucas: Good catch. On Wednesday, the VIX was up but the VVIX actually dipped. That divergence is unusual. It suggested the spike was being driven by forced covering, not genuine fear. And sure enough, Thursday we got a snapback rally. Luna: So that's a signal — if VIX is rising but VVIX is falling, it's a false breakout. Day traders can fade that spike. Lucas: Exactly. And if both are rising together, that's a confirmation of regime change. That's what we saw on Friday after the jobs report. Both VIX and VVIX spiked, and the market sold off into the close. Luna: Let's talk about the VIX futures curve specifically. Where is the contango now? Lucas: As of Friday's close, the front-month VIX futures settled around 21.50, while the second month was around 19.50. So we're actually in backwardation — spot is higher than the next month. That's rare. It means the carry trade is completely inverted. Lucas: Historically, when the VIX goes into backwardation, it doesn't last long — usually a few days to a couple of weeks. But while it's in backwardation, day traders should expect continued high volatility and sharp reversals. Luna: So the strategy shifts from selling volatility to buying it. Or at least hedging with VIX calls. Lucas: Right. I'm not suggesting you go long VIX futures directly — that's a losing game in a backwardation market because you're paying negative roll yield. But buying put spreads on the S&P 500 or call spreads on the VIX can work. Luna: What about the specific level of the VIX at 21.51? Is that high enough to be a concern for day traders? Lucas: It's elevated but not panic territory. The VIX was below 16 just a week ago. So the jump is significant — it's a 34 percent move in five days. That kind of spike usually precedes at least another week of elevated vol. Luna: Especially with a Fed meeting coming up later this month. Chair Warsh is going to have to address the jobs data. Lucas: Exactly. The market is pricing in no cuts for June and maybe one for September. That's a big shift from just a month ago when two cuts were expected. Luna: So for the day trader listening right now, what's the one concrete thing they should do Monday morning? Lucas: Check the VIX futures curve first thing. If backwardation persists, cut your position size by at least half. Focus on stocks with high beta to the VIX — energy, financials, which tend to hold up better — and avoid the high-multiple tech names until the VVIX drops below 90. Lucas: And if you see the VIX open above 22, that's a signal to stay in cash for the first hour until the market digests the weekend news. Luna: That's solid advice. Lucas, thanks for breaking down the VIX carry trade. I think a lot of our listeners got caught in the whipsaw this week and this gives them a clear framework. Lucas: Happy to. The key takeaway is: when the VIX structure flips, your trading plan has to flip with it. Don't fight the carry trade.