VIX is at its lowest levels over the last year, and VVIX is also down quite a bit. Looks great, right?
Turns out this is an artifact of how the VIX is calculated. What seems to be more important is the that “fixed strike vol” is actually up (refer to image below). In other words, the vol of higher strikes are lower than those of lower strikes, so VIX went down because it is calculated. But the vol of each of the strikes themselves went up.
Had never really dug into this “fixed strike vol” business before, but after hearing the vol master Cem Karsan mention it yet once again, dug into it a bit.
Andy Constan has a great explanation that goes into the details.
The long and short of it is, despite what the VIX be suggesting, underlying vol is actually going up.