Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / Why the VVIX Matters More Than the VIX Right Now
Transcript
- Lucas: So the VIX is sitting at around 14.25, down almost eight percent on the week. And if you just looked at that number, you'd think everything's fine. Markets are calm, right? But there's a quieter number in the volatility complex that's still at a level that screams, 'not so fast.' Luna: You're talking about the VVIX, right? The volatility of the VIX. It's one of those arcane indicators that most retail investors never even see. Lucas: Exactly. And it's at 87.48. Down about five percent this week, but historically, that's a high number. And here's the thing: when the VIX drops and the VVIX stays elevated, it tells us something about the fragility of that calm. It's like the market is saying, 'We're relaxed now, but we're ready to jump at any moment.' Luna: And that's exactly the kind of signal that can catch you off guard if you're only watching the VIX. I love this angle because it's so under-the-radar. Lucas: And honestly, if today's conversation helps you think about your own portfolio a little differently, that's the link — buy me a coffee dot com slash fexingo. It's the smallest ask, and it keeps these episodes ad-free. Luna: Yeah, we don't say it often, but listener support is what keeps this going. And we're back to the VVIX in a second. Lucas: So let's unpack what the VVIX actually is. It's a measure of the implied volatility of VIX options. In plain terms, it tells you how much traders expect the VIX itself to move. When the VVIX is high, that means options on the VIX are pricing in big swings in volatility. Luna: So it's like a fear gauge for the fear gauge. If the VIX is the market's anxiety level, the VVIX is how anxious the market is about that anxiety. Lucas: That's a great way to put it. And the reason it matters right now is the divergence. The VIX has been falling for weeks. It's down about eight percent in just five days. But the VVIX is still above 85, which is historically the kind of level you see during periods of stress. Even with the VIX at 14. Luna: And that's not typical, is it? Normally they move together. Lucas: Right. In a truly calm market, you'd expect the VVIX to be below 80, maybe even lower. The last time we saw a similar setup — VIX low, VVIX high — was before the August 2024 selloff. That one caught a lot of people off guard. Luna: So why is the VVIX still so high? What's driving that? Lucas: A few things. First, options traders are still paying up for protection against a sharp spike in volatility. They're not willing to sell VIX calls at cheap prices because they remember how quickly things can turn. Second, there's an event risk overhang — the Fed, the election cycle, and a yield curve that's steepening again. The ten-year Treasury is at 4.63 percent, and the two-year is at 4.15. The spread has widened to fifty basis points, which is something we've talked about before. Luna: And that steepening curve, it's not always a growth signal. It can also be a fear signal, right? Lucas: Exactly. When long-term yields rise faster than short-term, it can mean the market is worried about future inflation or fiscal deficits. And that makes options traders nervous. They see that bond market signal and they know it can spill into equities quickly. Luna: So the VVIX is kind of a leading indicator for the VIX. When the VVIX is high, it's like the market is coiling a spring. Lucas: That's the metaphor I use. And there's research that shows the VVIX tends to peak before the VIX does. It's not a perfect timing tool, but it's a warning that the calm might not last. Luna: So what should an ordinary investor do with this? I mean, we're not advocating for day-trading VIX futures. Lucas: No, and we're not. But this is useful for anyone who's thinking about their risk exposure. If you're in a portfolio that's heavily tilted to tech, and you see the VVIX at 87, it might be a reason to check your hedges. Maybe you have some cash on the sidelines, or you own a bit of a volatility ETF as insurance. It's not about predicting the next crash; it's about being prepared. Luna: And one way to use it is to watch for a spike in the VVIX. If it really takes off, that often comes a few days before a big move in the VIX itself. Lucas: Right. In fact, there have been studies that look at the ratio between the VVIX and the VIX. When that ratio gets extreme, it's a signal. Historically, when the VVIX is more than six times the VIX, it's been a warning. Right now, that ratio is about six point one. So we're right at that threshold. Luna: And that's the kind of specific number that I can actually take to a friend and say, 'look, this is why I'm not fully invested.' Lucas: Exactly. Now, let's be clear: these aren't perfect signals. The VVIX can stay high for a long time without a crash. But it's another piece of the puzzle. And what I like about it is that it's based on actual options prices, not just sentiment. It's real money being put at risk. Luna: And it ties into something we've touched on before: the difference between realized volatility and implied volatility. The VIX is implied, the VVIX is implied on the implied. It's layers of expectations. Lucas: Right. And that's why it's so useful. It's not just about what's happening in the market today; it's about what option traders think will happen tomorrow. And they're nervous. Luna: So, given all this, what would you say to someone who's thinking about buying the dip right now? Because the market has been resilient — the S&P is up about 0.4 percent this week, the NASDAQ is up half a percent. There's a temptation to dive in. Lucas: And look, buying the dip can work. We're not saying it can't. But with the VVIX at 87, the odds of a sharp drawdown are maybe a bit higher than the optimism in the VIX suggests. I'd say: if you're going to buy, do it in tranches. Don't put all your cash to work at once. And make sure you have a plan for what you'll do if the VIX spikes to 20 or 25. That's not a prediction, but it's a possibility. Luna: So it's about positioning, not timing. That's a good note to end on. But before we go, I want to circle back to the broader context. The VVIX is at 87, but the VIX at 14.25 is still below its long-term average. Does that mean the market is actually priced for calm, and the VVIX is the outlier? Lucas: That's a fair challenge. And it's true that the VIX is low. But realized volatility is also low. So the VIX is consistent with the actual moves we've seen. The VVIX, on the other hand, is about what traders think could happen. And that's why the divergence matters. It's a sign that the market is not fully convinced the calm will last. It's like the difference between reading a weather forecast that says clear skies and seeing that the barometer is dropping. Luna: I like that. So the VVIX is the barometer. And right now, it's pointing to a change in the weather, even if the sky is clear. Lucas: Exactly. And for investors, that's a reason to keep your umbrella handy. Not to panic, but to be prepared. Luna: Well, on that note, I think we've given everyone something to chew on. Thanks for listening, and we'll catch you in the next one.