Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / How the VVIX at 93 Signals Real Options Risk
Transcript
- Lucas: So the VIX is sitting at about 16 and a half, down over two percent on the week. That looks calm. But the VVIX — the volatility of the VIX — is at 93 and climbing. That is not calm. Luna: And for anyone who doesn't track the VVIX daily, 93 is a pretty elevated level, right? Lucas: Yeah, well above its historical median, which is around 85. We saw it in the 80s for most of June, and now it's pushing toward 95. That tells me options dealers are pricing in a much wider range of outcomes for the VIX itself — meaning they expect spikes. Luna: So the VIX is low, but the VVIX is saying the VIX could jump sharply. That's a divergence. Lucas: Exactly. And that divergence is a signal. When the VIX is low and the VVIX is elevated, it usually means the market is pricing in a tail-risk event — something that could send volatility spiking, but that hasn't materialised yet. Think of it as options dealers building a premium into VIX options because they see a non-zero chance of a panic. Luna: And we have a couple of macro reasons for that nervousness. The yield curve is still steepening — the ten-year versus two-year spread is now 36 basis points, up from 35 yesterday. And then there's the Warsh testimony today. Lucas: Right, Fed Chairman Kevin Warsh is testifying before the House Financial Services Committee right now, and he's talking about a 'regime change' in Fed policy. That kind of language introduces uncertainty. Dealers hate uncertainty. Luna: And they're pricing that uncertainty into VIX options, which pushes the VVIX up, even if the spot VIX stays low. Lucas: Exactly. So here's the practical takeaway. If you're managing a portfolio and you've been looking at the VIX at 16 and thinking, 'Great, no need to hedge,' the VVIX is telling you that might be premature. The cost of VIX call options — the premium you'd pay to protect against a spike — has gone up. Luna: So hedging is more expensive precisely when it might be more needed. Lucas: Yeah, and that's the paradox. But you don't have to buy a full hedge. You could look at tail-risk ETFs or put spreads. The point is to be aware that the options market is sending a signal that the equity market isn't. Luna: And it's not just the VVIX. The skew in S&P 500 options — the difference between out-of-the-money put prices and at the money — has also widened. That's another sign dealers are nervous. Lucas: That's a great point. So all these signals are converging. And yet the S&P 500 is at 7,543, up 0.8 percent over the past five days. The Nasdaq is even stronger. So the equity market is ignoring this. Luna: Which is exactly when you want to pay attention to the derivative market. Lucas: Yeah. And look, I'm not saying a crash is imminent. But the VVIX at 93 is a yellow flag, not a red one. It says, 'Be careful, have a plan.' And if you've gotten value from our conversations about navigating these signals, honestly, a couple of dollars a month helps keep this show ad-free and independent. You can support us at buy me a coffee dot com slash fexingo. Luna: Yeah, it genuinely makes a difference. Even a small amount helps us keep digging into these angles. Lucas: So back to the VVIX. The fact that it's climbed from the mid-80s to 93 over the past few weeks, while the VIX has stayed flat, is a divergence that historically has resolved with a VIX spike within one to three months. Not always, but often enough to warrant attention. Luna: And the magnitude matters too. A VVIX at 93 is not the same as a VVIX at 120, which we saw during the 2020 crash. So it's not panic mode, but it's above normal. Lucas: Right. And one way to think about it: the VIX is the price of volatility. The VVIX is the price of volatility of volatility. When the price of volatility of volatility goes up, it means dealers expect the price of volatility itself to become more volatile. That's a second-order effect that most retail investors miss. Luna: And it's exactly the kind of signal that institutional desks watch. So for our listeners who want to think like an institution, this is a key metric. Lucas: So what do you do with it? If you have a long-only equity portfolio, maybe you tighten your stop-losses or reduce position sizes in high-beta names. If you're an options trader, you might sell VIX call spreads to capture the premium, but with the understanding that a spike could hurt. Luna: Or you could just do nothing but be aware that the risk premium has gone up. Sometimes awareness is the hedge. Lucas: That's actually a really good point. Because the biggest mistake investors make is being surprised by volatility. If you know the VVIX is elevated, you won't be caught off guard when the VIX jumps from 16 to 22 in a week. Luna: And given the macro backdrop — Warsh's regime change language, the steepening yield curve, and still-high inflation — being surprised seems more likely than not. Lucas: Yeah. So to sum it up: VIX at 16, VVIX at 93. That divergence is a yellow flag. Pay attention to it, have a plan, and don't let the calm indexes lull you into complacency. Luna: Well said. And we'll keep watching it. Lucas: Next time, maybe we'll look at what happens when the VVIX breaks above 100. That's a whole different conversation.