Latest / The Day Trading Podcast with Fexingo: Active Trading, Charts, and Short-Term Market Strategy / How Day Traders Read the VIX Crush Into Earnings Season
Transcript
- Lucas: VIX is at 16.64, down nearly 12 percent in the last five days. The S&P 500 just hit 7,499. And we are walking straight into earnings season. Luna: That drop feels like the market is pricing in a smooth earnings period. But if history is any guide, the VIX crush itself can be a signal for a volatility snapback. Lucas: Exactly. The VIX is a forward-looking measure of expected 30-day volatility. When it collapses going into earnings, it's often because the market is assigning a low probability to big surprises. But the problem is that earnings season is inherently a time of high uncertainty. Luna: So you're saying the VIX might be underpricing the actual risk. That's a classic setup for a vol spike. Lucas: Right. Look at the VIX term structure right now. Front-month futures are trading around 17, while second-month is closer to 19. That's a contango structure, but the spread is narrowing. When the spot VIX drops faster than futures, it can signal that the market is getting complacent. Luna: And the VVIX is at 86.87, down 9 percent. That's the volatility of the VIX itself. When both drop together, it means options on the VIX are also pricing in less risk. Lucas: Which creates an opportunity for traders who think the calm is temporary. One approach is to buy VIX call spreads, say the 20/25 strike for the August expiration, betting that the VIX will rise into earnings season. The premium is relatively cheap right now because implied volatility is low. Luna: But you have to be careful. The VIX crush can persist if the market keeps rallying. We've had a strong first half, with small caps up 1.3 percent in the last five days alone. The momentum is still upward. Lucas: That's why I'm not advocating a pure long vol position. Instead, consider a VIX calendar spread: sell the front-month, buy the back-month. You capture the contango decay if the VIX stays low, but you're protected if vol spikes into earnings. Luna: So you're trading the shape of the curve, not the level. That makes sense for a day trader with a 10- to 20-day horizon. Lucas: Exactly. And if you're more active, you can trade the VIX futures directly. The front-month contract is rolling premium of about 0.5 points per week. If you short the front-month, you collect that decay. But you have to be ready to cover fast if the VIX jumps. Luna: There's also the earnings play on individual stocks. The VIX crush is a macro signal, but the real volatility happens at the micro level when companies report. Lucas: Absolutely. For day traders, the VIX environment tells you how much premium is priced into options overall. When the VIX is low, single-stock implied vols tend to be lower too. That creates opportunities for volatility arbitrage, like buying straddles on stocks with high earnings beta. Luna: Right. If the VIX is artificially low, then single-stock options are also cheap. You can buy a straddle before earnings and expect a larger move than what's priced in. Lucas: But you have to be selective. Not every stock will move. Look for names with a history of big earnings reactions, or those that have been range-bound recently. The ai driven names, for example, have been volatile but some have tightened up recently. Luna: And with the Fed still hawkish—Hammack said AI could fuel inflation—that adds another layer. If rates stay high, it could dampen earnings growth and surprise to the downside. Lucas: That's the wildcard. The VIX crush might be too optimistic. If we get a few negative pre-announcements, the VIX could spike back to 20 quickly. That's why I like the calendar spread: it's directional on the structure, not on the level. Luna: Let's talk about the actual trade mechanics. For someone trading the VIX futures, what's the minimum capital? Lucas: Each VIX futures contract controls about $1,000 times the index. So at 16.64, one contract is worth about $16,640 in notional value. The margin requirement is typically around $2,000 to $3,000. So it's accessible for retail traders with a moderate account. Luna: And for options on the VIX, the contracts are European-style, cash-settled. So no early exercise risk. Lucas: Right. And you can trade them on the CBOE. The VIX options have a multiplier of 100. So a VIX call at 20 strike costs about $1.50, or $150 per contract. That's cheap, but the liquidity is decent for the front two months. Luna: One thing I want to caution on: the VIX is mean-reverting, but it can stay low for weeks. Don't get caught trying to catch a falling knife. Lucas: Completely agree. The best approach is to build a position gradually. If you buy a VIX call spread and the VIX drops another point, you can add to it at a lower cost. DCA into volatility. Luna: And if you're wrong, you cut the loss. The risk is defined with spreads. Lucas: Exactly. The VIX crush into earnings is a classic setup, but it's not a sure thing. The key is position sizing and having a plan for both scenarios. Luna: So for listeners: pay attention to the term structure, watch for a VVIX divergence, and don't fight the trend if the market keeps grinding higher. Lucas: Before we dive deeper, I want to mention something. If you've been finding these trading conversations useful, there's a way to support the show directly. We keep the podcast ad-free because of listeners like you. Luna: Yeah, it's a small thing but it makes a big difference. Any support helps us keep doing deep dives like this. Lucas: If you're inclined, you can visit buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash fexingo. No pressure ever. Now, back to the VIX setup. Luna: So we talked about calendar spreads. What about using VIX options to hedge a stock portfolio? Lucas: That's another angle. If you're holding a lot of tech stocks through earnings, buying a VIX call can protect against a market-wide selloff. It's cheaper than buying puts on each stock. Luna: And it's portable. You can add it to any portfolio without changing your stock positions. Lucas: Right. The VIX is a portfolio hedge. With the VIX at 16.64, the cost is low. You can buy a 20-strike call for about $1.50. That's like paying 0.15% of notional for tail protection. Luna: And if the VIX spikes to 25, that call could be worth $5 or more. That's a 300% return on the hedge. Lucas: But again, timing matters. If you buy it too early and the VIX stays low, you lose the premium. That's why many traders wait for a signal, like the VIX breaking below 15 or a VVIX drop below 80. Luna: What about the VVIX itself? At 86.87, it's still above 80, which is the typical threshold for a low vol regime. Lucas: Good point. The VVIX at 86.87 suggests that options on the VIX are still pricing in some tail risk. Not extremely low, but not high either. If it drops below 80, that could be a stronger signal that the market is too complacent. Luna: So the VVIX is confirming the VIX crush but not screaming reversal. That's a nuanced read. Lucas: Exactly. And that nuance is what separates a good trade from a loss. You have to look at the whole picture: VIX level, term structure, VVIX, and the broader market trend. Luna: Speaking of broader trend, the S&P 500 is up 1.9% in five days and the Nasdaq is up 2.9%. That's a strong rally. The VIX crush is partly a reflection of that rally. Lucas: Yes, the inverse correlation between the VIX and the S&P 500 is running at about -0.8 right now. So as stocks go up, vol goes down. But that correlation can break down during earnings season if there's a surprise. Luna: So the key takeaway for today: the VIX crush into earnings is a setup worth watching. Use calendar spreads or cheap hedges, but don't overcommit. Lucas: And keep an eye on the VVIX. If it diverges from the VIX—if VIX drops but VVIX stays flat or rises—that's a warning sign that a vol spike is coming. Luna: Good stuff. For next time, maybe we'll look at how to trade the VIX term structure during earnings season itself. Lucas: That would be a great follow-up. We'll see how the setup evolves over the next couple weeks.