Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / What the VVIX Spike Tells You That the VIX Hides
Transcript
- Lucas: The VIX is sitting at 15.40 as of this morning. That is not a scary number. That's historically calm — below the long-term average around 20. But the VVIX, which is the volatility of the VIX itself, is at 85.75 and it's up 4.3 percent in the last five days. Luna: So the market's fear gauge is quiet, but the fear of fear gauge is getting twitchy. That feels like a contradiction. Lucas: It is, and it's the kind of divergence that historically matters. The VIX tells you what options traders expect the S&P 500 to do over the next thirty days. The VVIX tells you how uncertain those traders are about that expectation. When the VIX is low but the VVIX is rising, it means the market is pricing in calm — but it's not confident in that calm. Luna: Right. It's like the forecast says 72 degrees and sunny, but the weather app has a 40 percent chance of a thunderstorm. The headline looks fine, the fine print is nervous. Lucas: Exactly. And this exact setup has flashed before big dislocations. In early February 2018, the VIX was around 13, VVIX was above 100. Then we got the Volmageddon spike where the VIX hit 50 in a day. In February 2020, just before COVID crashed markets, the VIX was in the mid-teens and the VVIX was already elevated. Luna: The VVIX is not a timing tool. It doesn't tell you 'sell everything tomorrow.' But it does tell you the options market is paying up for tail risk even as the headline VIX looks benign. Lucas: That's the key takeaway. The VIX is a snapshot. The VVIX is the meta-signal. And right now that meta-signal is saying the market is pricing in a non-negligible chance of a volatility event. The question is what's driving it. Luna: What's your read on the source? Is this the yield curve steepening, the small-cap weakness, something else? Lucas: I think it's a combination. The ten-year Treasury yield is at 4.49 percent, the two-year at 4.08, so the spread has widened to 42 basis points. That steepening is usually a sign that the bond market expects stronger growth or higher inflation. But for equity options traders, a steeper curve also means more uncertainty about how the Fed will react. And uncertainty is what the VVIX captures. Luna: So the bond market is sending a mixed signal — growth expectations are improving, but the path for rates is less clear. And that ambiguity is showing up in the volatility of volatility premium. Lucas: Right. And then there's the Russell 2000. The small-cap index is down 0.9 percent over the past five days, even as the S&P and Nasdaq are flat to slightly up. That divergence — large caps holding up, small caps softening — is another reason options traders might be hedging more aggressively. Small caps are more sensitive to credit conditions and domestic growth. If they're struggling, it raises questions about the broader economy. Luna: So the VIX at 15 says 'all clear,' but the VVIX at 85 says 'maybe not.' For a regular investor who doesn't trade options, how should they interpret this? Should they do anything? Lucas: I think the first step is just awareness. If you own a standard 60-40 portfolio, you're implicitly exposed to equity volatility. A rising VVIX doesn't mean you should sell, but it does mean the cost of portfolio protection — put options, tail-hedge strategies, even just holding more cash — is probably worth evaluating. The market is pricing in a higher probability of a shock, whether or not that shock materialises. Luna: And for people who are tempted to sell covered calls or cash-secured puts to generate income in this low vix environment, this is a warning that the VIX might not stay low. Lucas: Exactly. Selling volatility when the VIX is 15 and the VVIX is rising is like selling insurance right before a storm is forecast. The premium looks attractive, but the risk of a big payout is increasing. That's the kind of trade that can work for months and then blow up in a week. Luna: Speaking of things that are worth evaluating — and I know this is a bit of a pivot, but it connects — we keep this show ad-free, and that's intentional. The reason we can do that is listener support. Lucas: Yeah. And honestly, if today's conversation helped you think about the vix vvix dynamic differently, or if you've gotten something useful from any of our episodes, that's the link — buy me a coffee dot com slash fexingo. It's genuinely the smallest possible ask. Luna: And it keeps the show independent. No ads, no sponsors dictating topics. So thank you to anyone who's already done that. It matters. Lucas: Alright. Back to the volatility picture. So the VVIX is elevated, the yield curve is steepening, and small caps are showing cracks. But there's another layer here that I think is underappreciated, and it's about how the VIX itself is constructed. Luna: Go on. Lucas: The VIX is calculated from S&P 500 options across a range of strike prices. It's a model-based number. And one thing that happens when the VIX is low is that options traders shift their hedging into out-of-the-money puts — cheap tail protection. That buying pressure can actually push up the implied volatility of those far-dated, far-strike options without moving the VIX much. The VVIX captures that because it reflects the volatility of the VIX futures, which are more sensitive to tail risk. Luna: So the VVIX is picking up activity that the VIX underweights. That's a structural argument for why the divergence can persist for a while. Lucas: Exactly. And it's not just a theoretical point. In the spring of 2021, the VIX was in the high teens, but the VVIX spiked above 120 in May. That was a period when everyone was talking about 'transitory inflation' and the Fed was dovish. The VIX said calm. The VVIX said the options market was nervous about a regime change. And of course, we got the taper tantrum later that year and the bear market in 2022. Luna: So the VVIX has a decent track record as a leading indicator of volatility regime shifts. Not perfect, but useful. Lucas: I'd say it's one of the more overlooked signals in the options market. Most people just look at the VIX level and decide if they're scared or not. The VVIX tells you whether the market itself is scared of its own fear. That's a second-order signal that can give you an edge. Luna: And right now, with the VVIX at 85 and rising, it's worth paying attention. What would it take for you to get more concerned? A VVIX above 100? Above 120? Lucas: I'd start paying very close attention if the VVIX breaks above 100 while the VIX stays below 18. That would be the same pattern we saw before the 2018 crash and before COVID. If the VIX itself starts rising — say above 20 — then the divergence resolves, but that's actually less interesting because then the fear is out in the open. The real danger is when the fear is hidden. Luna: Hidden fear is a good way to put it. And for the listener who wants to track this themselves, what's the easiest way to check the VVIX? Lucas: Most free financial sites don't show it prominently. You can find it on the CBOE website, or on Bloomberg or Reuters terminals. Some brokerages include it in their options analysis tools. But honestly, just knowing the number and the trend — is it rising or falling? — is enough. You don't need to trade it to benefit from the signal. Luna: So to wrap this up: VIX at 15 says all clear. VVIX at 85 and rising says maybe not. The yield curve steepening and small-cap weakness reinforce the message that the easy-money environment is shifting. And the options market is quietly pricing in a higher probability of a volatility event, even if it's not calling the timing. Lucas: That's the picture. And the nice thing about the VVIX is that it's not a call to action. It's a call to awareness. If you know the signal is there, you can make more deliberate choices about your portfolio's risk exposure. You don't have to react — you just have to pay attention. Luna: And maybe buy a coffee. Or don't. Either way, we'll be here tomorrow with another signal to watch. Lucas: Exactly. Thanks for listening.