Latest / The Day Trading Podcast with Fexingo: Active Trading, Charts, and Short-Term Market Strategy / How the VIX Carry Trade Explains This Week's Whipsaw
Transcript
- Lucas: So the VIX is at 21 and a half this morning, up 34 percent in five days. The Nasdaq just had its worst week since March of 2023, down more than 5 percent. And I think the most interesting thing for a day trader right now isn't the spike itself — it's what happens next, and specifically the VIX carry trade. Luna: Carry trade in volatility — that sounds like something only a quant desk would touch. But you're saying retail traders can actually use this? Lucas: They can, if they understand what it is. The carry trade here means selling VIX futures and buying spot VIX — or more practically, shorting the futures curve when it's in contango. Right now, the front-month VIX futures are trading around 23, while spot VIX is at 21 and a half. That one-and-a-half-point gap is the carry. Luna: So the idea is that if volatility doesn't spike further, the futures will converge down to spot, and you pocket the difference? Lucas: Exactly. That's the classic carry. But it's not risk-free. If the market sells off more, spot VIX could jump past futures, and you get crushed. The VVIX — the volatility of volatility — is at 102, up 11 percent in five days. That tells you the market is pricing in a higher chance of a VIX spike than usual. Luna: Right, so the carry trade works best when you think the sell-off is overdone and volatility will mean-revert. Do you think that's the case here? Lucas: That's the million-dollar question. Look at the catalyst — Friday's jobs report came in hot, and Chair Warsh basically said the Fed is on hold for the foreseeable future. So rates aren't coming to the rescue. But the sell-off feels more like a positioning unwind than a fundamental shift. The S&P 500 is only down 2.8 percent in five days, while the Nasdaq is down 5.1. That dispersion is a clue. Luna: Dispersion — big tech names getting hit harder than the rest of the market. That's consistent with a rotation out of AI winners, not a broad panic. Lucas: Exactly. And when it's a rotation sell-off rather than a systemic one, VIX spikes tend to fade faster. The carry trade becomes more attractive. So a day trader could look at selling the front-month VIX futures around 23 and buying the VIX as a hedge. But the execution matters a lot. Luna: How would you actually size that trade? I imagine most retail accounts can't short VIX futures directly. Lucas: You're right. Most brokers require a margin account with futures approval. But there's an ETF workaround. The ProShares Short VIX Short-Term Futures ETF — SVXY — is essentially short the carry. You can trade it like a stock. But there's roll cost and contango decay. If the VIX stays elevated longer, SVXY bleeds value. Luna: So the alternative is buying VIX call spreads. If you think the spike is peaking, you could sell a VIX call at a higher strike to finance a put, or just wait for a VIX drop and buy puts. Lucas: Right. The smarter play for many day traders is to stay in equities but hedge with VIX options. For example, buying a VIX 25 call for next week — around 60 cents — and selling a VIX 30 call for 10 cents. That net 50-cent debit caps your risk. If the VIX blows past 30, you miss out, but if it stays below 25, you lose the 50 cents. That's a defined-risk bet that volatility won't explode. Luna: I like that structure. The max loss is small, and if the VIX mean-reverts back to 18 or 19, you keep the premium. But the VVIX at 102 suggests the options market thinks a big VIX move is more likely than usual. Lucas: That's the tension. The VVIX is saying 'be careful, the VIX could jump again.' But the carry trade is saying 'sell the futures, they're overpriced.' Historically, when VIX is between 20 and 25 and the VVIX is above 100, the VIX tends to move lower over the next two weeks about 60 percent of the time. That's a decent edge. Luna: You have that stat off the top of your head? Lucas: I looked it up this morning — I'm not that good. But it's from a study by the CBOE on VIX futures returns since 2007. The data is out there if you dig. Luna: So the actionable takeaway — if you're a day trader watching this week's whipsaw — is to consider a short volatility position but with defined risk. Either through SVXY if you can stomach the contango decay, or through a VIX call spread. Lucas: And don't forget to monitor the VVIX. If it starts dropping below 95, that's a signal that the market is pricing in less uncertainty about volatility. That's when you can get more aggressive on the carry trade. If VVIX stays elevated above 105, you might want to stay small or wait. Luna: Good rule of thumb. One thing I've noticed — when the VVIX is this high, intraday VIX moves get choppier. You can't just buy a VIX put and walk away. You need to watch the tape. Lucas: Absolutely. This is not a set-and-forget trade. It's active. The VIX can gap up on any headline — like a surprise Fed comment or a geopolitical flash. That's why defined risk is key. Luna: Speaking of which, I know we're talking about trading, but honestly, if today's episode helped you think about volatility in a different way, that's the kind of thing that makes this show worth it. If it was worth a coffee to you, there's a link — buy me a coffee dot com slash fexingo. No pressure, just if it added value. Lucas: Yeah, that's exactly right. We keep this show ad-free because listeners like you support it. It's a small thing that makes a big difference. Luna: So back to the trade — any final thoughts on what you're watching this week? Lucas: Monday morning open. If the VIX opens above 22 and then starts fading in the first hour, that's a signal that the spike is losing steam. I'd look for a short VIX trade there. If it gaps above 23, I'd wait. The carry trade is a game of patience. You don't need to catch the exact top. Luna: Patience and risk management. That's the whole game. Lucas: That's the whole game.