Latest / The Day Trading Podcast with Fexingo: Active Trading, Charts, and Short-Term Market Strategy / How Day Traders Read the VIX 15 Level for Low-Variance Entries
Transcript
- Lucas: So the VIX closed today at 15.03 — down three and a half percent on the week. That's right at the bottom of the range we've been tracking since late June. Luna: And the VVIX barely budged — 87.28, up 0.2 percent. That's interesting, because normally when the VIX drops that much, the volatility of volatility comes with it. Lucas: Exactly. That's the tension I want to drill into today. The VIX is low, but the VVIX is not confirming the move. For day traders, that's a signal worth paying attention to. Luna: It smells like a potential pin action setup. The VIX has been stuck between 14.5 and 16 for about three weeks now. Lucas: Right. And when the VIX gets pinned like that, the options market is basically saying 'I don't expect much.' But low vol environments are exactly where you get the sharpest reversals. Think back to late 2023 — the VIX sat at 12 for weeks, then we got a two-point spike in three days. Luna: So the question is: how do you trade this without getting caught in the chop? Lucas: First thing: look at the term structure. When the VIX is at 15, the front-month futures usually trade at a slight contango. But if the second-month is only, say, 16.5, the roll yield is tiny. That means the usual 'sell the VIX futures' carry trade isn't very attractive. Luna: Which pushes traders into shorter-dated options on SPY or SPX instead. That's where the edge lives. Lucas: Exactly. My go-to in this regime is a short-dated put spread on SPY. If the VIX is low and the market is drifting higher — S&P 500 at 7,575 today — the put premiums are cheap. You can sell a put spread that's 1 percent out of the money, collect maybe 15 to 20 cents, and let theta do the work. Luna: But that only works if the VIX stays low. If the VIX pops, those puts get more expensive fast. Lucas: Right, and that's why you keep the duration tight — three to five days max. If the VIX spikes, you're out before gamma gets you. The key is recognizing when the VIX pin is about to break. Luna: What's your tell for that? Is it the VVIX? Or something else? Lucas: I look at the vvix to vix ratio. Right now it's around 5.8 — that's elevated relative to the VIX level. Historically, when that ratio gets above 5.5 with the VIX under 16, you tend to get a vol spike within two weeks. Luna: So the market is implying that while current vol is low, the risk of a jump is higher than normal. Lucas: Exactly. And that's why I'm not just selling premium — I'm also looking for a cheap hedge. A long VIX call spread, maybe the 17.5 and 20 strikes, expiring in two weeks. The premium is maybe 30 cents, and if we get that spike, it can triple. Luna: So the trade is a short premium position on SPY, funded partially by a long premium position on VIX. That's a volatility carry trade. Lucas: You got it. The net theta is positive, but you've got a tail hedge in case the pin breaks. And with the VVIX elevated, that tail is cheaper than it looks. Luna: What about the actual mechanics of the VIX options? A lot of day traders find them clunky because they settle to the opening print of the VIX futures. Lucas: Yeah, VIX options settle to the Special Opening Quotation, which can be a pain. But if you use SPX options instead, you get cash-settled European exercise, and the liquidity is way better. The trade-off is that SPX options are tied to the index, not the VIX directly. Luna: But the correlation is high enough that a VIX spike usually means an SPX drop, so it works as a proxy. Lucas: Exactly. And SPX options have tighter bid-ask spreads. So for a day trader, I'd rather trade SPX than VIX options any day. Luna: Let's get into a specific setup. What would you put on Monday morning? Lucas: Say SPY opens around 575. I'd sell the 565 put and buy the 560 put for a credit of 0.15, expiring Wednesday. That's a 5-wide spread, so max loss is 4.85, max gain 0.15. The probability of touching 565 in two days is maybe 15 percent based on current vol. Luna: And on the hedge side? Lucas: Buy the VIX 17.5 call and sell the 20 call for 0.30, expiring in three weeks. That's a net debit spread with a 2.5 point width. If VIX spikes to 20, that spread is worth about 2.50. Luna: So the combined cost is 0.15 net debit. That's a nice risk-reward. Lucas: Right. And if nothing happens, you lose the 0.15. If the VIX spikes, you can make 10 to 1 on the hedge alone. Luna: One thing that's key — you have to be disciplined about taking off the short side if the market starts to drop. The put spread can go against you fast. Lucas: Absolutely. I set a stop loss at a 50 percent loss on the put spread. So if the credit goes from 0.15 to 0.30, I'm out. That limits the damage. Luna: And the hedge — do you let it run? Lucas: I let the hedge run until expiration, unless VIX hits 20. Then I take profits. No need to be greedy. Luna: And you know, this kind of disciplined approach is exactly why we don't clutter these episodes with ads. We'd rather keep the conversation focused on the actual mechanics. Lucas: Yeah, we deliberately don't run ads on these. If that's something you value and you want to support it, the link is buy me a coffee dot com slash fexingo. No pressure, just putting it out there. Luna: Exactly. It keeps us independent, and we can talk about whatever we want. Lucas: Alright, so back to the setup. I also want to look at gamma levels. With SPY at 575, the 0 delta put is around 560. That's where gamma starts to accelerate. If the market drops toward 570, gamma on those puts explodes. Luna: So if you're short the 565 put, and SPY drops to 570, you're still safe. But at 568, gamma starts to pile on. Lucas: Exactly. That's why I like the 565-560 spread — it's just below the high gamma zone. If the market drops to 568, I'm still in the sweet spot where theta dominates gamma. Luna: And if it drops to 565, gamma takes over, but you've got the stop loss in place. Lucas: Exactly. The whole trade is built around the idea that the VIX pin holds for a few more days. But if it breaks, you're hedged. Luna: So the big question: do you think the pin holds? The S&P is at 7,575, up half a percent on the week. The Dow is down, the Russell is down. There's some rotation happening. Lucas: I think the pin holds for now. The market is waiting for something — maybe the next Fed meeting, maybe earnings season. But the VVIX saying 'be ready' suggests we're in a calm before the storm. Luna: And that's exactly the environment where these low-volatility trades work best. Lucas: Right. As long as you manage your risk and don't get complacent. Low vol is not no vol. Luna: Alright, good stuff. Let's check back in a few days and see if the pin breaks. Lucas: Sounds like a plan. Thanks for sticking with us.