Latest / The Day Trading Podcast with Fexingo: Active Trading, Charts, and Short-Term Market Strategy / Day Trading the VVIX Collapse After the VIX Spike
Transcript
- Lucas: The VIX jumped more than six and a half percent over the last five sessions. It's sitting at 17.49 this morning. But the VVIX — the volatility of volatility index — actually dropped nearly six percent over the same period, down to 88.43. That's not a typo. Luna: So the market is getting more jittery, but the folks who price options on volatility are getting less jittery? That seems backwards. Lucas: It's backwards only if you think the VIX spike is the start of a sustained sell-off. The VVIX collapsing tells you that the options market expects the VIX to mean-revert quickly. And when the VVIX is below 90 while the VIX is above 17, that's historically a signal to sell volatility, not buy it. Luna: What's the typical trade here? I've seen traders talk about VIX call spreads, but the VIX itself is still elevated. Lucas: Right, but you don't want to short VIX futures outright because contango can eat you alive. The cleaner play is selling VIX call spreads. For example, with the VIX at 17.5, you could sell the 20-25 call spread in the front month. That's a high-probability trade if the VIX stays below 20, which the VVIX data suggests is likely. Luna: And what about the equity side? SPY is up nearly one percent over the same period, so the VIX spike isn't even showing up in the S&P. Lucas: That's the key divergence. The S&P 500 is at 7,501, up 0.9% in five days. The VIX is up because of tail risk — geopolitical stuff, the Iran talks, the Fed transition. But the market is shrugging it off. That tells me the VIX spike is a buy-the-dip-in-volatility opportunity, not a signal to run for cover. Luna: Let's dig into the VVIX mechanics. When the VVIX is this low, what does it mean for market maker gamma? Because that's where the real trading edge lives. Lucas: Great question. Low VVIX means options dealers are charging less for tail risk. Their implied volatility curves are flattening. That makes them less likely to hedge delta aggressively, which means gamma squeezes are less likely. So if you're a day trader, you want to avoid big directional bets relying on dealer hedging. Instead, you want to be a net seller of premium — collect theta while the VIX grinds lower. Luna: So a short VIX call spread is one way. Are there SPX or SPY structures that work better intraday? Lucas: Yeah, for intraday, I like SPY put spreads when the VIX is elevated but VVIX is low. You sell an out-of-the-money put spread, say the 550-545 put spread in SPY. That gives you a wide buffer. And because the VVIX is low, the premium on those puts is inflated relative to the true risk. You're capturing that mispricing. Luna: That makes sense. The VIX is pricing in fear, but the VVIX says the fear is overpriced. So you sell the fear. Lucas: Exactly. And look at the macro backdrop. The Kevin Warsh Fed is in transition mode — markets are still trying to figure out his playbook. There's headline noise from Iran talks. But the underlying economic data hasn't rolled over. The VIX spike is mostly positioning and sentiment, not a fundamental shift. Luna: I want to step back for a second. You mentioned that listener support is what keeps these shows ad-free and independent. If our money conversations have helped you think about a decision differently, even a small contribution makes a real difference. A couple of dollars a month — buy me a coffee dot com slash fexingo — that genuinely helps us keep doing this. Lucas: Yeah, it's true. The show runs without sponsors, so it's listener-funded in a very direct way. Even five bucks helps cover hosting and data feeds. We appreciate every bit. Luna: Alright, back to the trade. So VVIX below 90, VIX above 17. Is there a historical analog that gives us a time frame for mean reversion? Lucas: There is. If you backtest this setup — VIX above 17 and VVIX below 90 — the VIX tends to revert below 15 within two to three weeks about 70 percent of the time. That's not a guarantee, but it's a strong probability edge. The key catalyst would be the Fed giving clear guidance or the Iran talks reducing tail risk. Luna: So the trade is duration-dependent. Short vol for the next couple weeks, but you might want to be ready to flip if the VIX breaks 19. Lucas: Exactly. If the VIX rallies above 19, the VVIX will likely spike too, and that setup breaks down. But as long as the VIX stays in the 16-19 range and VVIX stays below 95, the sell-vol trade is the right one. I'd put on a VIX call spread in the front month, or an SPY put spread, and manage it actively. Luna: What about the Russell 2000? The RUT is up 1.2% in five days, but it's still lagging the S&P year-to-date. Does the vix vvix divergence have implications for small-cap vol? Lucas: Yes, indirectly. The RVX — the Russell volatility index — tends to track VIX directionally but with a beta higher than one. If VIX mean-reverts, RVX should fall even more. That makes small-cap vol selling attractive too. But the liquidity in RVX options is thinner, so you'd want to use IWM options instead. Sell a put spread in IWM, same logic. Luna: Let's talk about the Fed angle specifically. Kevin Warsh hasn't even taken the helm officially, but the market is already pricing in a different regime. How does that play into the vix vvix divergence? Lucas: The Warsh nomination created a policy uncertainty premium in the VIX. Traders don't know if he'll be more hawkish or more pragmatic. But the VVIX drop suggests that uncertainty premium is overdone — the market is starting to assume continuity. So the VIX spike is partly a 'buy the rumor' on policy change, and the VVIX is 'sell the fact'. Luna: That's a good way to frame it. One last thing: for day traders who aren't option-savvy, is there an etf based way to play this divergence? Lucas: Sure. The simplest is to short the VIX futures ETF, ticker VIXY, or use an inverse product like SVXY. But those decay over time, so you need to be tactical. I'd only hold them for a few days. Alternatively, just go long SPY with a tight stop — if the VIX mean-reverts, equities tend to drift higher. Luna: So the core message: when VVIX is low and VIX is elevated, sell volatility. Don't chase the fear. Lucas: Right. The VIX spike looks scary, but the VVIX is telling you it's a mirage. That's the kind of structural edge that active traders can exploit. Just manage your risk, because if the VIX breaks 19, the whole setup flips. Luna: Alright, good stuff. Let's see how this plays out this week.