Latest / The Day Trading Podcast with Fexingo: Active Trading, Charts, and Short-Term Market Strategy / How Day Traders Read the VVIX Divergence into Earnings Season
Transcript
- Lucas: So the VIX closed today at 16.50, down about 2.4 percent over the last five sessions. The S&P 500 is basically flat around 7544, up less than a percent over the same stretch. Pretty sleepy tape on the surface. Luna: But you're not buying the calm, are you? Lucas: I'm not. Because the VVIX — that's the volatility of the VIX — closed at 93.53, up 2.4 percent. So you've got the VIX falling and the VVIX rising. That's a classic divergence. Luna: And that tells you that options dealers are pricing in more uncertainty about future volatility, even as current spot volatility drops. Lucas: Exactly. Think of the VIX as the market's expectation of realized volatility over the next 30 days. The VVIX is the market's expectation of how much that expectation itself is going to swing around. When they diverge like this — VIX down, VVIX up — it usually means traders are hedging against a sharp move, but they don't know which direction yet. Luna: And that's the perfect setup for what you call a 'straddle entry' in range-bound markets, right? Lucas: Right. And we're hearing a lot of talk about earnings season kicking off. Goldman Sachs reported today, beat estimates, stock popped. JPMorgan also beat. The headlines say 'AI boom winners', but the underlying VVIX divergence suggests those moves might not be the end of the story. Luna: So you're saying that even though the big banks delivered, the options market is pricing in more volatility ahead for the broader market. Lucas: Exactly. And it's not just the banks. The Russell 2000 is at 2965, up only 0.3 percent in five days. Small caps are lagging. That's another divergence — large caps near highs, small caps struggling. That kind of internal divergence often resolves with a volatility event. Luna: Give me a concrete example of how you'd trade this divergence as a day trader. Lucas: Sure. Let's say you're watching the S&P 500 ETF, SPY. It's been consolidating in a tight range for the last two days. The VIX is dropping, which tells you the crowd is complacent. But the VVIX is rising, which tells you the smart money is buying tail hedges. So you don't fade the range — you wait for a breakout. Luna: And when the breakout happens, you go with it, because the VVIX divergence suggests the move will have follow-through. Lucas: Exactly. You can also set up a straddle — buy a call and a put at the same strike, same expiration — but that's more of a swing-trade approach. For day trading, I prefer to wait for the break of the intraday range and then enter in the direction of the break. Luna: What expiration do you typically look at for the straddle version? Lucas: Usually the next weekly expiration, so about 5 to 10 days out. The VVIX divergence is a medium-term signal. It doesn't mean the market will explode tomorrow. It means the window for a large move is widening. If you buy a straddle with 30 days to go, you're paying too much theta decay. Luna: So you want to be closer to expiration to get more gamma — sensitivity to the move — but not so close that you're betting on a specific day. Lucas: Right. And there's another layer to this. The VIX term structure is in contango — futures prices are higher than spot. That's normal. But the VVIX term structure is also in contango, and the slope has steepened over the last week. That steepening in the VVIX curve is an even more specific signal that tail risk premiums are rising. Luna: And that's something a lot of traders miss. They look at the VIX level, see it falling, and think 'no volatility, no trades'. But the VVIX is telling you to stay alert. Lucas: Exactly. And I'd add — you don't need a dedicated VVIX charting tool. Most brokerage platforms have it. Just search VVIX or ticker V-V-I-X. If you don't have access, you can approximate it by looking at the VIX options chain. If VIX options are pricing in higher implied volatility, that's the same signal. Luna: Speaking of staying alert — I've been thinking about how this kind of signal requires a certain level of focus and discipline. And it reminds me that a lot of listeners have asked how we manage to keep producing these episodes day after day without ads. Lucas: Yeah, it's a good question. The honest answer is that a small group of listeners chips in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these. No ads, no sponsors, just people who find the conversations useful. Luna: It's a nice model. Keeps us focused on what matters — the actual signal, not the hype. Anyway, back to the VVIX divergence. Let's talk about how you can spot it on a regular trading day. Lucas: Sure. One practical tip: set a price alert on the VVIX. If it moves more than 2 percent in a day while the VIX is flat or down, that's a red flag. Check the SPY chart. If you see a tight range with low volume, you're in divergence territory. Luna: And what about the Russell 2000? It's been lagging. Does that change your trade plan? Lucas: It does. If the Russell is struggling while the S&P is holding, the divergence is even wider. That tells me the market is narrow — only a few stocks are driving the index. In that environment, a VVIX divergence is more likely to break to the downside, because the breadth is weak. Luna: So you'd tilt your straddle or your breakout trade toward the bearish side. Lucas: I'd lean that way, but I still wait for the actual break. The VVIX divergence tells you the move is coming, but it doesn't tell you direction. You need price confirmation. So I'd set buy and sell stops just outside the consolidation range. Whichever triggers first, I go with it. Luna: And what about position sizing in this setup? Lucas: I go smaller than usual because the move could be sharp but also potentially a fakeout. The VVIX divergence increases the probability of a real move, but it's not a guarantee. So I'd risk maybe half my normal size and add on confirmation — like a close above the range high on increased volume. Luna: That makes sense. And you can also use the VVIX level to set your stop. If the VVIX starts dropping back toward the VIX direction, the divergence is resolving, and you might want to exit. Lucas: Exactly. If the VVIX falls below 88 or so while the VIX stays around 16, the divergence is fading. That's a sign the tail risk premium is coming out, and the breakout might not have legs. I'd take profits or tighten stops. Luna: So to summarize: VIX down, VVIX up equals tail risk rising. Combine with a tight price range and weak breadth, and you've got a high-probability setup for a breakout trade. Lucas: Right. And it's especially relevant right now, with earnings season heating up and the Fed in focus. Kevin Warsh testified today, talked about 'regime change' in policy. That kind of macro uncertainty feeds into the VVIX divergence we're seeing. Luna: So the next few days could be interesting. We'll be watching the VVIX and the breadth indicators. Lucas: Absolutely. Keep an eye on that VVIX level around 90. If it holds above and the VIX stays below 17, the divergence is intact. If both drop together, the risk is off. If both spike, we're in panic mode. But right now, we're in that sweet spot where preparation meets opportunity.