Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / Why the VVIX at 91 Signals Real Options Risk
Transcript
- Lucas: The VIX is up four and a half percent over the past five days, settling at 16.9 as of this morning. That's notable, but it's not the volatility number I'm watching right now. Luna: You're going to say the VVIX, aren't you? Lucas: I am. The VVIX, which tracks the implied volatility of VIX options, closed at 91.38 yesterday. That's up 2.6 percent in a week. And for anyone who trades options or uses puts as portfolio insurance, that number tells a much more interesting story than the VIX itself. Luna: So the VIX says 'mild concern,' but the VVIX says 'dealers are pricing in something worse.' Lucas: Exactly. The VIX at 16.9 is actually below its long-term average of around 19.5. But the VVIX at 91 is well above its own median. Historically, when the VVIX gets above 90, it tends to mean that options market makers are charging a premium for tail risk — they expect the VIX itself to swing sharply, one way or the other. Luna: And that directly affects the price of puts and calls. When the VVIX is high, options are more expensive, even if the VIX is middling. Lucas: Right. So if you're a dip buyer who's been leaning on put spreads to hedge, you're paying more for that protection today than the VIX level alone would suggest. The VVIX is basically the market's estimate of how uncertain the VIX itself is. And right now, dealers are saying 'we don't trust this quiet.' Luna: It reminds me of the period in late 2018. The VIX was around 17 for a stretch, but the VVIX was elevated, and then we got that December sell-off. Not a perfect parallel, but the signal was similar. Lucas: That's a good comp. And if we look at broader market action, the Russell 2000 is down nearly 2 percent over the last five days. Small caps are getting hit harder than large caps. That divergence often shows up when the macro uncertainty is concentrated in domestic cyclical exposure. Luna: Plus the Fed minutes from yesterday showed a real split — some officials pushing for more tightening, others seeing enough progress. That kind of policy uncertainty feeds directly into the VVIX. Lucas: Yeah, the minutes described what one commenter called a 'family fight' over rates. When the Fed itself doesn't have a clear consensus, options dealers widen their bid-ask spreads, and the VVIX drifts higher. Luna: So for the listener who's not an options nerd — what's the practical takeaway? Lucas: A few things. First, if you're buying puts as a hedge, expect to pay a higher premium relative to the VIX. You're not getting ripped off; you're paying for the fact that the VIX could jump 20 percent in a day. Second, if you're selling premium — say, selling put spreads on indexes — the risk-reward is less attractive right now because the tail is fatter. You might collect a decent credit, but the left tail is priced to be heavier. Luna: And that's the kind of environment where a single black swan event can wipe out months of premium collection. Lucas: Exactly. I'd argue the VVIX at 91 is a better risk gauge than the VIX at 17, because it captures the market's uncertainty about that uncertainty. It's like the VIX is the temperature and the VVIX is the humidity — they both matter for comfort, but humidity tells you more about storms. Luna: That's actually a really helpful way to think about it. And it's one of those things that doesn't show up in the headlines. Every news outlet reports the VIX, but almost nobody talks about the VVIX. Lucas: Which is a shame, because the VVIX has been a leading indicator for some of the sharpest VIX spikes. In 2020, the VVIX started climbing a full week before the VIX exploded in February. It's not perfect, but it's worth watching. Luna: So someone listening right now — what's one concrete thing they should do with this information? Lucas: If you have an options position that's sensitive to volatility, check the VVIX before you enter. If it's above 90, size your trades smaller, or use calendar spreads to offset the elevated premium. And if you're just a long-term investor with a stock portfolio, you might consider buying a small amount of VIX calls as a tail hedge — but only if you can stomach the decay. Luna: Speaking of things that help you make better decisions — if today's episode helped you think about volatility differently, that's worth a coffee. Lucas: Absolutely. If this show has ever saved you from chasing a bad trade or helped you understand a risk you didn't see, the best way to keep it ad-free is a small gesture at buy me a coffee dot com slash fexingo. Luna: No pressure — just a way to say 'this matters.' And it genuinely helps us keep the lights on. Lucas: Alright. Back to the VVIX. One more nuance: the VVIX at 91 doesn't just affect equity options. It also bleeds into the bond market. The MOVE index, which tracks bond volatility, has been elevated too. That correlation makes sense when both rates and equities face the same macro uncertainty. Luna: And with the ten-year yield at 4.55 percent and the two-year at 4.19, the curve is still positively sloped by 35 basis points, but it's flattening again. That's another sign that the market isn't sure about the growth outlook. Lucas: The yield curve steepened earlier this year as growth expectations firmed, but over the last month it's been grinding flatter. A flatter curve combined with a high VVIX is a recipe for a volatility event. It doesn't mean one is imminent, but the ingredients are there. Luna: So the playbook isn't 'sell everything.' It's 'know what you own and what you're paying for protection.' Lucas: Exactly. And if you're not trading options, the VVIX still matters because it affects institutional hedging flows, which can amplify moves in the underlying indexes. When dealers delta-hedge their options books, a VVIX spike often correlates with increased market turbulence. Luna: Right. So even a buy and hold investor benefits from understanding this metric, at least as a barometer for when to add cash or defensive positions. Lucas: I think that's the real message today. Don't be fooled by a VIX at 16.9. The VVIX is telling you that the market is paying up for tail risk. That doesn't mean you should panic, but it does mean you should respect the price of insurance and maybe not go all-in on aggressive bets. Luna: Well said. Next time, we'll look at what Michael Burry's recent move into sportsbooks tells us about the next regulatory wave. Lucas: That's a good one. For now, keep your eyes on the VVIX, and we'll talk to you next time.