Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / What the VIX at 21 Means When the VVIX Is 102
Transcript
- Lucas: So the VIX hit 21.51 this week, up 34 percent in five days. That's the kind of jump that gets people's attention. But I'm more interested in something else: the VVIX, which measures volatility of VIX options, is sitting at 102. That's only up 11 percent over the same period. Luna: Right, so the VIX spikes hard, but the VVIX — the 'fear of fear' gauge — barely moves. That's a divergence we haven't seen in a while. Lucas: Exactly. And I think that tells us something about what the options market is pricing in. The VIX at 21 is elevated, sure — it's about one standard deviation above its long-term median. But the VVIX at 102 is actually below its own median of around 110. So the market is saying: yes, we're more scared this week, but we're not pricing in a catastrophic tail event. Luna: So the VIX says 'panic,' but the VVIX says 'meh.' Which one do we trust? Lucas: Historically, when the VIX and VVIX diverge like this, it's usually a mean-reversion signal. If the VIX spikes but the VVIX stays calm, it often means the move is overdone and we'll snap back within a couple of weeks. But there's a catch: if the VIX stays elevated for more than a week while the VVIX stays low, that can actually be a bearish signal — it means the market is complacent about tail risk, and that's when a bigger drop can surprise everyone. Luna: And we've got the Nasdaq down over 5 percent in the same five-day window. So this isn't just a VIX spike in isolation — it's tied to a real sell-off in tech. Lucas: Right. The Nasdaq is at 25,709, down 5.1 percent. That's a meaningful correction within the larger bull market. And the VIX spike is largely driven by tech-heavy index options. So the question is: is this a buying opportunity or the start of something worse? Luna: And the VVIX data suggests the options market isn't hedging for a crash — they're hedging for a moderate move. That leans toward 'buy the dip' if you're a contrarian. Lucas: But here's where I push back a little. The VIX at 21 is still below the 30 threshold that typically signals a real crisis. And the VVIX at 102 is below its own average. So you could argue the market is under-pricing tail risk. If we get another negative catalyst — say a hot CPI print next week or some geopolitical shock — the VIX could spike to 30 quickly, and the VVIX would catch up. Luna: So you're saying the divergence itself is a warning. The calm in the VVIX is actually dangerous because it means no one is paying for protection. Lucas: That's exactly the argument that Nassim Taleb would make. The real risk is in the tail, and when the market is complacent about tails, that's when they hit. But I want to balance that with some data. I went back and looked at every instance since 2010 where the VIX rose more than 30 percent in a week while the VVIX rose less than 15 percent. There were 14 occurrences. Luna: And what happened next? Lucas: In 10 of those 14 cases, the VIX was lower one month later. Average drawdown after the spike was about 4 points. But in the other 4 cases — including August 2015, February 2018, and March 2020 — the VIX kept climbing. Those were the ones where the initial spike was followed by another shock within two weeks. Luna: So the odds favor a snap-back, but the tail cases are nasty. That's a classic heads i win tails you lose setup for volatility sellers. Lucas: Exactly. And that's why I think the smart move here isn't to go all-in on a VIX spike trade or to assume it's a buying opportunity. Instead, look at what the VIX term structure is doing. The futures curve is in contango, but pretty flat — the front-month is around 21, the second month is around 22. That's not a steep contango, which means the market isn't expecting a quick return to calm. Luna: So no easy carry trade either. The VIX ETNs like UVXY would bleed in a flat contango environment if the spot doesn't keep rising. Lucas: Right. So my takeaway for listeners: don't chase the VIX spike with short-term options. Instead, consider buying put spreads on the S&P 500 for downside protection — the cost is elevated but not extreme, and if the VIX stays high, those puts will hold value. Or, if you're a long-term investor, do nothing. The VIX at 21 is not a crisis. It's a normal correction within a bull market. Luna: I think that's sensible. But let me add one more data point: the Russell 2000 is down 2.5 percent in the same five days, but the S&P 500 is down 2.8 percent. So small-caps are actually holding up better relative to large-caps. That's unusual — typically small-caps get hit harder in volatility spikes. Lucas: That's a great observation. It suggests the sell-off is concentrated in mega-cap tech, not a broad-based fear trade. The Dow is only down 0.4 percent. So this is a Nasdaq-driven VIX spike, not a systemic one. That supports the 'buy the dip in value' thesis, but not in tech. Luna: Speaking of which, I was looking at the sector performance for last week. The only sector that was green was utilities. So defensives are working. That's another sign that the market is rotating, not panicking. Lucas: Yeah, utilities up while tech down — that's a classic defensive rotation. And it's consistent with a VIX spike that's moderate, not extreme. So maybe the best analogy is February 2018, when the VIX spiked from 10 to 37 in a week, but the economy was still strong and the market recovered in a few months. That was a 'volmageddon' event, but it wasn't a recession. Luna: And that's the key question right now: is the economy strong enough to absorb this? We just got a hot jobs report on June 5, which pushed rate cut expectations further out. So the Fed is on hold, maybe even tilting hawkish. That's a headwind for stocks, but it's not a recession signal. Lucas: Right. GDP growth is still positive — real GDP growth annualized at 1.6 percent as of Q1. That's not booming, but it's not contraction. So the macro backdrop is mixed. Higher rates for longer, but growth still positive. That's a recipe for higher volatility, not a crash. Luna: So if I'm an investor listening to this, what's the one concrete thing I should do with the VIX at 21 and the VVIX at 102? Lucas: I'd say: check your portfolio's beta to the Nasdaq. If you're heavily exposed to mega-cap tech, consider trimming some and adding a hedge. If you're diversified across value, small-cap, and international, you can probably ride this out. The VIX at 21 is not a reason to panic sell. It's a reason to rebalance. Luna: And if you're a short-term trader, focus on the VIX term structure. If the contango steepens, that's a sell signal for VIX positions. If it flattens or inverts, that's a buy signal for protection. Lucas: Great point. And one last thing: the VVIX at 102 is actually a bit of a gift for anyone who wants to buy cheap tail protection. Because VIX options are priced with low vol of vol, you can buy out-of-the-money VIX calls for relatively cheap premium. If the VIX spikes again, those could pay off handsomely. But it's a lottery ticket, not an investment. Luna: So the bottom line: the VIX is up, but the VVIX is calm. That's a nuanced signal — not a clear buy or sell. It's a 'be careful and check your risk' signal. Lucas: Exactly. And honestly, if today's episode helped you think about the volatility landscape a little more clearly, that's the kind of value we're aiming for here. If it was worth a coffee to you, you know where to find us — buy me a coffee dot com slash fexingo. No pressure, just if it resonated. Luna: Yeah, listener support is what keeps this show ad-free and focused on the numbers. So if that matters to you, that link is there. Otherwise, we'll keep doing what we do. Lucas: Alright, so to circle back: the VIX at 21, VVIX at 102, Nasdaq down 5 percent in a week. The divergence says mean reversion is likely, but don't ignore the tail risk. The smartest play is to stay diversified, keep some cash, and don't chase the dip in high-beta names until the VIX settles below 18. That's my take. Luna: And mine too. Thanks for listening, everyone. We'll be back tomorrow with another angle. Lucas: Take care.