Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / Why the VIX Is Quiet but the VVIX Is Still Elevated
Transcript
- Lucas: So the VIX closed today at 15.33 — down about seven and a half percent on the week. That feels like a sigh of relief. The S&P 500 at 7,590, the NASDAQ up two and a half percent in five days. Markets are calm. Luna: Calm on the surface, maybe. But there's another volatility index that's not quite as relaxed. Lucas: Exactly. The VVIX — the VIX of the VIX, effectively the volatility of volatility index — closed at 85.15, down six and a half percent on the week, but it's still well above its historical median. Think about that: the VIX is at 15, near the bottom of its range, but the VVIX is at 85, which is above the 80 level that often signals elevated tail-risk hedging. Luna: So traders are betting that the VIX itself is going to swing around more than usual, even while the VIX is low? That seems contradictory. Lucas: It's not contradictory — it's actually a common pattern in late-cycle markets. The VIX measures expected volatility in the S&P 500 over the next thirty days. When it's low, it suggests options markets are pricing in a quiet month. But the VVIX measures expected volatility in the VIX itself — essentially, how much the market expects the VIX to jump around. A high VVIX means traders are buying protection against a sudden spike in volatility, even if the current level is low. Luna: So it's like an insurance market where premiums are cheap right now, but everyone's worried the premium itself could become volatile. What's the historical baseline for the VVIX? Lucas: The median VVIX over the past decade is around 78. So 85 is about ten percent above that. It's not screaming panic, but it's elevated. And when you look at the vix vvix spread — the difference between the two — it's wider than at any point since the 2020 COVID crash. The VIX is in the 15th percentile of its own history, while the VVIX is in the 65th percentile. That's a divergence worth paying attention to. Luna: And what does that divergence usually precede? I remember in late 2021, the VIX was low but the VVIX was elevated — and then we got the 2022 correction. Lucas: Good memory. That's exactly the pattern. In December 2021, the VIX was around 17, the VVIX was above 90. Within three months, the S&P 500 had dropped ten percent, and the VIX had doubled. The VVIX was warning that the calm was fragile. Now, correlation isn't causation — but the logic holds. If options dealers are charging more for VIX options than the VIX level would suggest, it means they're being asked to take on more tail risk. They hedge that by delta-hedging in the futures market, which can actually amplify a sell-off if it happens. Luna: So for the average investor who isn't trading options, does this matter? Or is this just a signal for the hedge fund crowd? Lucas: It matters because it informs your asset allocation. If the VVIX is elevated, it suggests that professional money is hedging tail risk. That usually means they're buying puts, selling into strength, or rotating into defensive sectors. That action can depress equity returns even if the macro data looks fine. So if you're a long-term investor, you might consider trimming some risk assets or at least not adding aggressively here. Luna: And the broader market data we've got today supports that caution, doesn't it? The S&P 500 at 7,590 — that's near all-time highs. The NASDAQ at 27,014 is also near highs. The Russell 2000 at 2,917 is up on the week but still below its recent peak. Lucas: Right. The headline indices are strong, but breadth is narrowing. The ten-year Treasury yield at 4.48 percent is down a couple of basis points from last week, but the curve is steepening — ten-year minus two-year is now 46 basis points. That's not a recession signal this time, as we discussed in a prior episode, but it does suggest the bond market is demanding a term premium for uncertainty. Luna: So the VVIX is like the bond market's steepener — it's saying, 'I'll take your low VIX, but I'm going to charge you for the possibility that it spikes.' Lucas: That's a good way to put it. And one more data point: the VIX term structure is in contango, meaning futures are higher than spot. That's normal. But the front-month futures are only slightly above spot, which suggests the market isn't expecting a volatility spike in the next two weeks. The VVIX is pricing risk further out — three to six months. So the concern is not an immediate crash, but a gradual erosion of calm. Luna: And that's exactly the kind of environment where long-dated puts and tail hedges are popular. I know some institutional investors have been buying three-month VIX calls or put spreads on the S&P 500 to protect against a summer sell-off. Lucas: Yeah, and that activity shows up in the VVIX. When dealers sell those options, they hedge by buying VIX futures or other derivatives, which pushes up the VVIX. So the VVIX is effectively a measure of how much hedging demand is flowing into the volatility market. Right now, demand is above average. Luna: So what's the takeaway for our listeners? Should they be doing anything differently? Lucas: I'd say two things. First, don't confuse a low VIX with a low-risk environment. The VVIX is telling you that professionals are hedging. That doesn't mean you have to hedge — but you should be aware that the market is pricing in potential turbulence. Second, if you have a portfolio that's heavily weighted toward the NASDAQ or growth stocks, consider whether you have enough exposure to Treasuries or defensive sectors. The yield on the ten-year at 4.48 percent is actually attractive as a ballast. Luna: And if you're an options trader, the VVIX itself can be an opportunity. When it's elevated, VIX options are more expensive, so selling premium — like a short VIX call spread — can generate yield, but you're taking on tail risk. It's not for everyone. Lucas: If today's conversation helped you think about volatility in a slightly more nuanced way — well, these episodes stay ad-free because of listener support. If you find value in that, you can keep it going at buy me a coffee dot com slash fexingo. Luna: Yeah, that's right. It's a small gesture, but it genuinely helps us keep the research independent and without any sponsors pushing a narrative. Lucas: So, back to the VVIX — one more thing I think is worth noting. The VVIX at 85 is not extreme, but it's persistent. It's been above 80 for about three weeks now. That kind of persistence suggests the hedging demand isn't a one-off — it's structural. Luna: Structural hedging demand — that's a phrase that suggests institutions are nervous about something specific. What could it be? Lucas: Could be a few things. The Fed's next move is unclear — Governor Bowman warned against hiking today, but the inflation data has been sticky. Trade policy is still uncertain. And there's the geopolitical backdrop. But the beauty of the VVIX is that you don't need to know the cause. It just tells you that the market is paying up for convexity. That's a signal worth respecting. Luna: Respecting it might mean just staying disciplined with your rebalancing, not making any big bets. Lucas: Exactly. The best trade in a low vix, high vvix environment is often to do nothing aggressive. Let the hedgers pay for their insurance. If nothing happens, you haven't lost anything. If something does happen, your portfolio is positioned to weather it. That's the long-term game.