Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / How the VIX at 17 Changes Your Options Strategy
Transcript
- Lucas: The VIX closed yesterday at 17.65. That's down 9.4 percent in the last five days. The VVIX — the volatility of volatility — dropped even harder, down 10.8 percent to 88.71. And I think that gap tells us more about where we are than either number alone. Luna: So the VIX is low but not screamingly low — 17 is still above the long-term median around 15 or so. But the VVIX at 88 is near its historical lows. That's the part that catches my attention. Lucas: Exactly. The VVIX measures the price of tail risk — the cost of hedging against a crash. When it collapses, it means options sellers are charging very little for out-of-the-money protection. And when protection is cheap, the temptation is to sell it. Luna: And a lot of people are doing exactly that. I've seen a wave of put-selling strategies being pitched to retail investors — 'collect premium in a calm market.' How risky is that right now? Lucas: Let's put some numbers on it. Say you sell a put on the S&P 500, roughly 5 percent below the current level — so around 7,070 on the index. With the VIX at 17, the premium might be around 1.5 percent of notional per month. That's a decent yield. But here's the catch: the VVIX at 88 tells you that the market expects those tail moves to be small and infrequent. Luna: Which is exactly when a sudden spike is most painful. Because nobody's pricing it in. Lucas: Right. Look at what happened in early 2020 — the VIX went from 14 to 82 in a matter of weeks. The VVIX exploded. Anyone who had been selling puts at VIX 14 got wiped out. The same pattern happened in 2018 with the volmageddon event. The VIX was around 11, the VVIX was low, and then — boom. Luna: So the question is whether this time is different. The macro backdrop is definitely not the same as 2020. Real GDP growth is at 2.1 percent annualized, up from 0.5 percent last quarter. That's a solid recovery. The yield curve is still positive — 10-year at 4.38, 2-year at 4.07, spread of 28 basis points. Lucas: But that spread is down from 31 basis points just last Friday. It's flattening again. The yield curve has been a pretty reliable predictor of volatility regimes — when it flattens, the VIX tends to eventually rise. Not immediately, but within a few months. Luna: So the VIX is low, the VVIX is even lower, the curve is flattening — and yet the macro data is decent. That's a confusing cocktail. Lucas: It is. And I think the honest take is that the VVIX at 88 is pricing in a world where nothing bad happens. But markets don't work that way. The VVIX has a tendency to revert to its mean of around 100, and when it does, it's rarely a gentle move. Luna: So for someone who's currently selling puts or selling volatility, what's the play? Just stop? Lucas: I wouldn't say stop, but I'd say size down. Maybe sell closer to the money where the premium is higher, but buy protection further out. A put spread — sell the 7,070 put and buy the 6,600 put — limits your downside. The premium is lower, but you're not naked. Luna: And the cost of that protection is cheap right now because of the low VVIX. So it's actually a good time to be a buyer of tail risk, not just a seller. Lucas: That's the counterintuitive part. When the VVIX is this low, buying a tail hedge is inexpensive. It's like insurance during a drought — you hope you don't need it, but the premium is as low as it gets. And if you're running a portfolio of equities, a small allocation to VIX calls could pay off massively if vol spikes. Luna: I want to circle back to the yield curve for a second. The 10-year is at 4.38 percent, the 2-year at 4.07 percent. That's a 31-basis-point spread that narrowed to 28 yesterday. What does that flattening tell us about market expectations for growth? Lucas: Typically, a flattening curve suggests the market thinks the Fed might have to cut rates sooner than expected, or that long-term growth expectations are softening. But here's the weird part: the economy just grew at 2.1 percent annualized. That's not weak. So the flattening might be more about technical factors — foreign demand for Treasuries, or positioning ahead of the second half. Luna: Or it could be that the market is pricing in a slower second half. GDP data is from Q1 — January first. We're now at the end of June. A lot can change in six months. Lucas: True. And the VIX at 17.65 with that flattening curve — it's not screaming danger, but it's also not the all-clear. I think the smart approach is to acknowledge that the VVIX is telling us something real: the market is complacent. Not necessarily wrong, but complacent. And complacency is a fragile state. Luna: So what's your concrete takeaway for someone listening? What should they do with this information? Lucas: A few things. One: if you're selling options, use spreads. Two: consider buying a small amount of tail protection — VIX calls or SPX put spreads — while it's cheap. Three: watch the yield curve. If the spread goes below 20 basis points, that's a warning signal. And four: don't confuse a low VIX with low risk. The VIX measures expected volatility over the next 30 days. It doesn't measure the probability of a crash. Luna: And if I could add a fifth: pay attention to the VVIX. If it starts to rise while the VIX is still low, that's often the canary. Because it means options sellers are suddenly demanding more for tail risk — and they usually know something. Lucas: Yeah, that's a great point. The VVIX is like the whisper number for volatility traders. When it moves, it's worth listening. Luna: One thing I wanted to mention — and it's a bit of a meta point — but we're able to have these conversations without ads because of a small group of listeners who support the show. It's a model we really believe in, and it's what keeps us independent. Lucas: Yeah, absolutely. If our money conversations have helped you think about a decision differently, and you want to help keep them going, you can find us at buy me a coffee dot com slash fexingo. No pressure at all — just a way for those who find value to chip in. Luna: And it genuinely makes a difference. We're not a giant network. We're a small team that cares about getting the details right. Lucas: So back to the vol picture — I want to wrap with one more data point. The S&P 500 closed at 7,440 yesterday, up 1 percent in the last five days. The Dow at 52,183, also up 1 percent. The Nasdaq at 25,820, up 0.9 percent. Everything is grinding higher, but the volatility indices are diverging. That's a setup worth watching closely. Luna: For now, the market is calm. But the VVIX at 88 is a reminder that calm doesn't last forever. Thanks for listening, and we'll be back tomorrow with another angle. Lucas: Take care, everyone.