Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / How the VVIX Spike Reveals Tail Risk Hiding in a Calm Market
Transcript
- Lucas: The S&P 500 is down about one and a half percent over the past five trading days. The Nasdaq is off more than two percent. Meanwhile, the Russell 2000 — small caps — is up nearly two percent. That rotation story is real, and we've talked about it a lot. But today I want to look at something underneath that surface that feels more like a warning. Luna: The VIX ticked up to 18.93, up about two and a half percent on the week. That's not nothing, but it's hardly alarming. You're looking at the VVIX, aren't you? Lucas: Exactly. The VVIX — the volatility of the VIX — closed at 99.28, up over thirteen percent in five days. That's a much bigger move in percentage terms than the VIX itself. And historically, when the VVIX spikes while the VIX is still relatively low, it often signals that options market makers are pricing in a higher probability of a sudden, sharp move — a tail event. Luna: So the VIX says 'mildly nervous,' but the VVIX says 'brace for something.' That divergence is the signal. Lucas: Right. And it's not just a one-day blip. Let me give you some context. The VVIX has averaged around 85 over the past five years. It can trade as low as 70 in complacent bull markets and spike above 150 during crises — think March 2020, or the 2018 volatility shock. At 99, it's above its long-term median but not screaming. The concern is the rate of change: up thirteen percent in a week when the VIX itself barely moved. Luna: And the VIX is still below 20, which historically has been a zone where investors let their guard down. So the VVIX is basically the market's way of saying 'you're not paying enough attention.' Lucas: That's the framing I want to dig into. Because if you're a long-only investor — say you own an S&P 500 index fund — the VIX at 19 doesn't scream 'hedge me.' But the VVIX is suggesting that the cost of tail-risk protection is rising faster than the overall fear gauge. That creates an opportunity to buy insurance before the crowd panics. Luna: What's your preferred hedge in this environment? Because buying VIX calls outright is expensive and tends to decay quickly. Lucas: I'd look at VIX put spreads — sorry, I mean put spreads on the VIX? No. Let me be clear. I'm talking about buying VIX call spreads. You buy a VIX call at, say, the 22 strike and sell a call at the 27 strike. That caps your upside but also cuts the premium by roughly half. The idea is that you don't need the VIX to go to 40 — you just need a modest spike to 22 or 23 to make money. Luna: And the VVIX spike tells you that the market is pricing in a higher chance of exactly that kind of move. So the call spread gives you exposure to the tail without overpaying for insurance you might not need. Lucas: Exactly. The other approach — and this is something I think is underappreciated — is to allocate a small piece of your portfolio to managed-futures trend followers. These are systematic strategies that go long or short based on momentum. They tend to perform best during abrupt regime changes. And the VVIX is essentially a regime-change indicator. When it's rising, it's saying the trend may be about to break. Luna: Let's tie this back to the rotation we're seeing. Small caps are rallying while large-cap tech is selling off. That could be a healthy rotation, or it could be the beginning of a broader risk-off move. The VVIX doesn't tell you which, but it tells you to pay attention. Lucas: Right. And that's the point of this episode. Not to predict the next crash, but to recognize that the options market is sending a signal that's worth heeding. The VVIX at 99 with the VIX at 19 is like a canary that's singing a little louder than usual. It doesn't mean the mine is collapsing, but it means you should check your emergency gear. Luna: So what's the one concrete takeaway for a listener who manages their own portfolio? Should they adjust anything today? Lucas: I'd say this: if you have a concentrated position in tech or high-beta stocks, consider buying a three-month put spread on the S&P 500, say the 7,000/6,800 put spread. It's cheap right now because the VIX is low. The VVIX spike says that cheapness may not last. Locking in protection now, even if you don't end up needing it, is like buying fire insurance during a dry spell — you hope it's wasted money. Luna: And if you're more of a set-it-and-forget-it investor, maybe just rebalance into some defensive sectors. Utilities, consumer staples, healthcare. They've been lagging, but they tend to hold up when the VVIX is rising. Lucas: That's a good point. And speaking of things that hold up — the conversations we have on this show are exactly the kind that help people think about their money differently. If that resonates with you, and you'd like to support keeping this podcast ad-free and independent, you can always buy us a coffee. That's buy me a coffee dot com slash fexingo. No pressure, but it helps us keep the lights on and the analysis sharp. Luna: Yeah, and every bit of support goes right back into making the show better. So thank you to anyone who's already done that. Now, back to the VVIX — I want to ask about one more nuance. The VVIX has a term structure too, right? Lucas: It does. The VVIX futures curve is usually in contango, meaning longer-dated VVIX is higher than spot. But when the front-month VVIX starts to rise faster than the back months, that's a signal that tail risk is being repriced in the near term. That's exactly what we're seeing this week. Luna: So the curve is flattening or even inverting at the front. That's historically preceded some of the sharpest selloffs — 2018, 2020, even the 2022 bear market. Lucas: It's not a perfect signal, but it's a strong one. And combining it with the VVIX level gives you a pretty robust tail-risk indicator. I'd say the probability of a five percent or greater drawdown in the next month is higher than what the VIX alone suggests. Luna: So we're not calling a crash, but we're saying the odds have shifted. That's a useful distinction for listeners. Lucas: Exactly. And that's the framework we try to bring every episode: not fear-mongering, but data-driven probability shifts. The VVIX at 99 with a steepening front curve is a data point worth acting on. Even if it's just shortening your duration in bonds or taking a little bit of profit in your winners. Luna: Great. So to sum up: VIX at 19, VVIX at 99 and rising, small caps diverging from large caps. The message is hedge selectively, don't panic, but don't ignore it either. Lucas: Well put. And we'll keep watching this signal in the days ahead. Thanks for listening.