Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / Why the VVIX at 88 Signals Hidden Options Risk
Transcript
- Lucas: So the VIX is sitting at 15.84 as of this morning, July 10th. That's up about 1.7 percent over the past five days, but it's still in that low-teens range that a lot of investors look at and say, 'Okay, calm markets, no drama.' Luna: Right, and that's exactly the kind of reading that makes people comfortable selling options or piling into leveraged ETFs. But I know you've been watching something else. Lucas: Exactly — the VVIX. That's the volatility of the VIX itself. It's at 88.78 today, essentially flat over the week. But here's the thing: the VIX is low, the VVIX is actually elevated relative to its own history. The median VVIX over the past decade is somewhere around 85, so 88.78 is above that. And when the VIX is below 16 and the VVIX is above 85, that historically signals that options markets are pricing in a higher chance of a sudden spike in fear. Luna: So the market is calm, but the market's expectation of future fear is high. That's a weird paradox. Lucas: It is. And it matters because the VVIX is really an indicator of tail risk for anyone who's short volatility. If you're selling options, especially naked puts or call spreads, a high VVIX means the cost of hedging that position just went up, and the chance of a rapid gap move is elevated. Luna: What does this look like in practice? Give me a concrete example from this week. Lucas: Sure. Look at the yield curve — the 10-year minus 2-year spread is now 38 basis points, up from 35 just a couple days ago. That's a steepening move. Bond volatility often translates into equity volatility with a lag. The VVIX is picking up on that risk before the VIX does. So someone who's been selling VIX futures or writing SPX puts might see their positions look fine today, but the VVIX is telling you the risk of a sharp reversal in the VIX — say, a jump to 20 or 25 — is higher than normal. Luna: And when the VIX jumps that much, it's usually bad for leveraged ETFs and anyone with short-dated options. Lucas: Exactly. There's a well-known pattern: when the VIX is below 18 and the VVIX is above 90, the S&P 500 tends to have a higher probability of a 2 percent or larger drop within the next month. We're not quite at VVIX 90 yet, but 88.78 is close. The gap between the VIX and its own volatility is a classic contrarian signal. Luna: I remember looking at this back in 2018, right before the February volmageddon. The VIX was around 11 and the VVIX was above 100. Everyone thought volatility was dead. Then it came roaring back. Lucas: That's the textbook case. February 5, 2018 — the VIX spiked from about 13 to 37 in a single day, and XIV, the short-volatility ETN, basically went to zero. The VVIX had been elevated for weeks beforehand. So this isn't just theoretical. It's a real risk for anyone who's positioned for continued calm. Luna: And right now, we have a lot of reasons to think calm might not last. You mentioned the yield curve steepening. Also, the prediction markets have been pricing in a higher probability of geopolitical shocks — gas prices staying high, Iran tensions. That kind of uncertainty doesn't show up in the VIX immediately, but it feeds into the VVIX. Lucas: That's a great point. The VVIX is more sensitive to rare events because it's derived from options on the VIX, which themselves are influenced by tail-risk hedging. So when you see the VVIX elevated, it's a signal that someone big — maybe a pension fund or a macro hedge fund — is buying protection against a crash, even though the spot VIX looks benign. Luna: So what should a regular investor do with this? Not everyone is trading options. Lucas: If you hold a broad equity portfolio, you might want to check your hedges. If you've been meaning to buy some put protection or add a tail-risk hedge, the premium is actually reasonable right now because the VIX is low. But the VVIX suggests that waiting could be expensive. Alternatively, if you're in leveraged ETFs — like a 3x bull fund — those products are especially vulnerable to a VIX spike, because they have to rebalance into volatility. It's worth sizing down if you're overexposed. Luna: I also think it's useful to just be aware of the signal, even if you don't act. It's a reminder that low volatility doesn't mean no risk. Lucas: Exactly. And look, this is the kind of conversation we have every day on this show — trying to understand what the market is actually telling us, not just what headlines say. It takes time and research to dig into these indicators, and we do it because we genuinely enjoy helping people think about their money more clearly. Luna: Yeah. And honestly, a big part of why we can keep doing this without ads or corporate sponsors is that some of our listeners chip in. A small but meaningful group supports us through Buy Me a Coffee. It's at buymeacoffee.com/fexingo. Lucas: That's right. It's a simple way to help us keep the show independent and focused on what matters, without chasing clicks. No pressure, but if you've found value in episodes like this one, that's where you can throw in a few bucks a month. And it really does make a difference. Luna: So anyway — back to the VVIX. At 88.78, it's not at a crisis level yet, but it's worth watching. If it crosses above 90, I'd take it as a more serious warning. Lucas: Agreed. And I'd add: keep an eye on the yield curve too. If the 10-year yield keeps rising and the spread widens beyond 50 basis points, that could be the catalyst that sends the VIX higher. The VVIX might be the early alert system for that move. Luna: So the takeaway: low VIX doesn't mean low risk. The VVIX is telling us to stay humble. Lucas: Exactly. Stay sharp, and we'll talk tomorrow.