Latest / The Day Trading Podcast with Fexingo: Active Trading, Charts, and Short-Term Market Strategy / How Day Traders Read the VIX 95 Level for Mean Reversion
Transcript
- Lucas: So the VIX is at 18.65 today, up about 13 percent over the last five sessions. But the number I actually care about right now is the VVIX. Luna: Yeah, VVIX hit 102.82. That's up almost 10 percent in the same window. Lucas: Right, and that's the bigger story for day traders. The VIX tells you what the market expects for the next thirty days. The VVIX tells you what the options market expects for the VIX itself. When the VVIX spikes above 100, it usually means traders are pricing in a jump in near-term volatility. Luna: But we've seen VVIX above 100 a few times this year. What's different now? Lucas: What's different is the level we're watching underneath. I've been looking at the VVIX 95 level as a mean-reversion trigger. When VVIX pushes above 95, it tends to snap back quickly — within a day or two. And when it breaks above 100, the snap-back is even sharper. Luna: So you're saying if VVIX is at 102.82, the odds favor a drop back toward 95 or lower in the next couple of days? Lucas: Exactly. And that creates a trade. If you're an options trader, you can sell premium — like an iron condor on SPX — expecting the VIX to cool off. Or if you trade futures, you can short VIX futures directly, although that's riskier because contango can eat you alive. Luna: Let's talk about the Russell 2000 move last week. That seemed to trigger the VVIX spike. Lucas: Yeah, the Russell dropped sharply on Thursday and Friday. The index is down 0.8 percent over five days, but intraday moves were bigger. That kind of small-cap selling often drives the VVIX higher because options on the Russell and small-cap ETFs get repriced quickly. Luna: And the VIX itself stayed relatively muted until Friday. It was around 16.5 earlier in the week. Lucas: Right. So you had a divergence: VIX creeping up, but VVIX screaming higher. That divergence is a classic mean-reversion setup. The VVIX tends to lead the VIX by about one to two days. If VVIX spikes first and then rolls over, the VIX often follows. Luna: So the trade would be to wait for VVIX to break above 95, then look for a reversal candle on the VVIX chart. Lucas: Exactly. I like to see VVIX touch or exceed 100, then close back below 95 on an intraday basis. That's the trigger. Last week, VVIX hit 102.82 on Friday, but it closed near 100. So we haven't seen the close below 95 yet. Luna: That means the setup hasn't fully triggered. We're still in the spike phase. Lucas: Correct. And that's actually useful information. If you're a day trader, you don't want to front-run this. You wait for the close below 95. If it happens Monday or Tuesday, you can sell premium on SPX options with a short-dated expiration. Luna: What about position sizing? Because mean-reversion trades can get crushed if the spike continues. Lucas: Good question. I'd risk no more than one to two percent of account on this. And I'd set a stop if VVIX closes above 105. That level has acted as resistance in the past. If we break above 105, the spike is accelerating and the mean reversion thesis is wrong. Luna: What about the broader market context? The S&P 500 is at 7443, down 1.3 percent over five days. That's a modest pullback, not a crash. Lucas: Right, and that's important. VVIX spikes don't always mean a market crash. Sometimes they just reflect a repricing of risk after a small dip. The fact that the S&P is only down 1.3 percent tells me this is more of a volatility event than a trend reversal. That actually supports the mean-reversion trade. Luna: Because if the market were in freefall, VVIX would stay elevated. Lucas: Exactly. In a crash, VVIX can stay above 100 for weeks. But in a routine pullback, the spike is short-lived. And the VIX at 18.65 is still below the historical average of around 20. So volatility is elevated but not extreme. Luna: Let's talk about the specific entry. If VVIX closes below 95, what's your next step? Luna: Time frame? How long do you hold? Lucas: One to three days max. The mean reversion usually happens fast. If VVIX hasn't dropped back below 95 within three days, I'd close the trade regardless. The thesis is invalidated. Luna: What about the India IPO frenzy we saw last month? Could that have any effect on VVIX? Lucas: Not directly. The VVIX is U.S.-centric. But global capital flows can affect U.S. volatility indirectly. If Indian IPOs are sucking liquidity out of emerging markets, that might add some pressure. But for day trading purposes, it's noise. Luna: Yeah, I think it's better to focus on the U.S. data. The VVIX 95 level has been reliable for the past two years. Lucas: It really has. And look, if today was actually useful to you, the way these stay ad-free is listener support. If you want to keep getting these specific setups without commercials, you can find us at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small way to help us keep doing this. And we really appreciate it. Lucas: So back to the VVIX. One thing I want to emphasize: don't trade the level alone. Always check the VIX term structure and overall market trend. The 95 level is a guide, not a guarantee. Luna: What about using options on VVIX itself? I know there's no direct ETF, but some traders use VIX options as a proxy. Lucas: Right, there's no direct VVIX product. But you can trade VIX options or futures. The key is to size your position based on the VIX, not the VVIX. The VVIX is just a signal. Luna: So for tomorrow, you're watching for a VVIX close below 95? Lucas: Exactly. If it happens, I'll likely sell an SPX iron condor with about a week to expiration. If it doesn't, I'll wait. Patience is part of the strategy.