Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / Why the VIX at 16 Is Misleading Investors
Transcript
- Lucas: The VIX is sitting at 15.97 today, down about six percent over the past five trading days. By most standards, that suggests a pretty calm market. Luna: But the VVIX is at 90 and ticked up half a percent. That's the VIX of the VIX — volatility of volatility — and it's telling a different story. Lucas: Exactly. The VIX itself measures implied volatility on S&P 500 options over the next 30 days. The VVIX measures implied volatility on VIX options — essentially, how much the market expects the VIX itself to bounce around. Lucas: When VIX is low but VVIX is elevated, it often means options dealers are pricing in a non-trivial chance of a volatility spike. They're not sure when, but they're hedging against a sudden jump. Luna: So the surface is calm, but underneath, traders are paying up for protection against a rug pull. That feels like a warning sign. Lucas: It is. Historically, when the VIX is below 16 and the VVIX is above 85, the S&P 500 has tended to see a sharp move — either up or down — within the next few weeks. The VVIX is basically a tail-risk gauge. Luna: And today, the VIX at 15.97 is in the 30th percentile of its own history, but the VVIX at 90 is in the 70th percentile. That's a big divergence. Lucas: Right. And if you look at options pricing, the implied probability of a five percent or greater drop in the S&P 500 over the next 30 days is about twenty percent. That's not tiny. That's one-in-five odds. Luna: That's actually higher than what we saw in early 2024 when the VIX was similarly low. Back then, the VVIX was around 70. So the market is pricing more tail risk now than it did a couple of years ago. Lucas: The question is why. Part of it might be the macro backdrop — we've got a steepening yield curve, real GDP growth at 1.6 percent, and the Fed still navigating inflation. But there's also a structural factor. Lucas: Volatility selling has become a popular strategy — people selling VIX futures or puts on the VIX to collect premium. That's created a crowded trade. When those trades unwind, it can amplify moves in the VIX itself. Luna: So the VVIX is also reflecting the risk of a gamma squeeze in volatility derivatives. Dealers are hedging that risk by demanding higher premiums for VIX options. Lucas: Precisely. And for the average investor, the takeaway isn't to panic. It's to recognize that a low VIX doesn't necessarily mean a safe market. If you're under-hedged, maybe consider buying a small amount of cheap index puts. Luna: But not too much. If the VVIX spike doesn't materialize into a crash, you'd burn premium unnecessarily. Lucas: Right. A barbell approach makes sense — keep most of your equity exposure, but add a small tail hedge. Options on the S&P 500 with strikes about five to ten percent below current levels are relatively cheap because the VIX is low. Lucas: And that's really the point: the VIX at 16 doesn't mean volatility is gone. It means the market is pricing in a low probability of a moderate move. But the VVIX says the probability of a sudden jump in volatility is above normal. Luna: It's like a weather forecast saying a 20 percent chance of a thunderstorm. You don't cancel your picnic, but you might pack an umbrella. Lucas: Exactly. And to extend that metaphor — the VVIX is telling you that the thunderstorm, if it comes, could be a doozy. Lucas: Historically, periods where VVIX was elevated relative to VIX have preceded some of the sharpest volatility spikes. August 2015, February 2018, March 2020 — all saw VIX double or triple within weeks. Luna: Those are extreme examples. But even in milder cases, like late 2023, the VIX went from 13 to 20 in a few weeks. Lucas: So if you're a long-term investor, you might just ride it out. But if you're closer to retirement or have a big cash need in the next six months, you might want to take some risk off the table. Luna: Or at least understand the risk you're taking. A lot of people see VIX at 16 and assume markets are fine. This episode is a reminder to look deeper. Lucas: And that's why we do this show — to help people see beyond the headlines. Luna: Yeah. And speaking of that, a quick thing — we keep this podcast ad-free and independent, and that's only possible because a small number of listeners support us monthly. Lucas: If our market breakdowns have helped you think about your portfolio differently, and you want to help us keep doing it, you can chip in at buy me a coffee dot com slash fexingo. It's literally what funds this. Luna: No pressure, no perks — just a way to keep the conversation going without ads or sponsors. And we really appreciate those who do. Lucas: Back to the VIX though — one more data point. The VIX term structure is in contango, meaning futures are higher than spot. That's normal. But the front-month VIX future is at 17.5, about 1.5 points above spot. Luna: That's a little steeper than usual. Typically the contango is about one point. So the market is already pricing in a rise in volatility over the next month. Lucas: Right. So the VIX at 16 isn't really 'calm' — it's more like 'calm for now.' The futures and the VVIX are both saying: expect something to change. Luna: And what's interesting is that the VIX itself is down six percent in the last five days, even as the S&P 500 only rose 0.9 percent. That suggests the VIX drop might be overdone. Lucas: Volatility tends to be mean-reverting. When it's this low, the odds of a snapback are higher. That's consistent with the VVIX signal. Lucas: So the bottom line: watch the VVIX, not just the VIX. If it stays elevated above 90 while the VIX drifts lower, that's a yellow flag. Luna: A yellow flag worth heeding. Thanks for digging into this — I think a lot of listeners will find it useful. Lucas: Glad to. And we'll keep an eye on how this divergence evolves. If the VVIX starts to fall, that would be a green light. Until then, stay cautious.