4/7 SPX -2.4%,yet VIX also dropped -1.3%. DMO?

Discussion in 'Options' started by newguy05, Apr 8, 2009.

  1. Hi DMO,

    Remember this discussion about the relationship between vix and spx, the basic conclusion was that vix and spx moves opposite of each other, and this relationship is assumed true unless proven false with an example.

    I think today is that example.

    What's your take? Is there any reasoning behind this disconnect? or just write it off as market randomness / complacency.


    SPX -19.93 (-2.39%)
    VIX -0.54 (-1.32%)
  2. dmo


    Hi Newguy:

    I'm attaching a 1-minute chart of the SPX vs the VIX showing that even yesterday the negative correlation held quite closely.

    That's not to say that every time the spx reaches, say, 850 the vix will be higher than every time the spx reaches 900. When the spx dropped to 850 last October the vix jumped to almost 90. The next time it dropped there in November, the vix jumped to only about 70. Still, on an intraday basis, particularly looking at 1-minute or 5-minute charts, you'll see the negative correlation with incredible consistency.

    Sure you may see a bar here or there that does not follow the rule. But if you can find a correlation that is 99% consistent, or even 90% consistent, I personally know of nothing more reliable in all of trading. If anyone knows of one I hope he or she will post it here.

    At the moment the vix is very high by historical standards, and the spx has been trading in a range for a while. So a little overall weakness in the vix should not be surprising.

    In fact, the vix is at a very "interesting" juncture. It is above 40%, and yet the April, May, June and July futures are trading at a premium to cash. I don't believe that ever happened before.
  3. dmo


    To clarify: I meant to say that I can't recall a time when the vix was trading above 40% AND, at the same time, the next few months' futures contracts were trading at a premium to cash.
  4. Heading into the Passover / Easter Holiday. Trading volume is much lighter today and volatility is collapsing.
  5. I think you need to also understand how the vix is calculated. Generally because of the way it is calculated even if Vols arent rising, if the market falls the vix read a rise. When we see something like this it is a real market signal. To me it states that we are seeing a flip flopping of how vols get higher and lower (not a reversal in skew like oil). But generally, because people expect a drop, ive been seeing vols rise on rally's and fall on drops. Just a thought.

    I actually blogged about yesterday. Take a look if you are intersted.

  6. IV is collapsing because of the absence of large daily movements. a vix of 45 suggests daily movements of 2.8%, but we have not had many such days in the past 6 weeks.

    traders no longer expect the wild 3%-4% swings like we had before, even when the market drops 2.5% like it did yesterday.
  7. The near term side of the vix curve traded at a premium to vix spot 2 weeks in December and nearly the entire January.

    OP, the disconnect is due to the holiday. Last few times the market closed for a holiday there has been a tendency for traders to lower options bids much sooner than usually. During the Thanksgiving and Christmas cycles the "disconnect" started appearing as early as a week before. Nothing to be concerned about, it's just synthetic time.
  8. dmo


    The near term, yes. But yesterday for example the April, May, June, July, August and September futures all closed at a premium to cash. During the period you mentioned, I don't believe the premium to cash went nearly that far back.

    I think you're right that what the OP saw is best explained as "synthetic time" - the sort of thing often seen on a Friday, and especially before a long weekend.
  9. So before a holiday / long weekend, the vix will likely to drop or remain flat even if the sp500 are going down.

    If that's the case, then would it make sense to make an IV play by being long vega, with the expectation that the IV will pick up again after the holiday.
  10. dmo


    It doesn't work that way. Here's what happens. Imagine it's Friday morning before a long weekend. Let's say xyz 90 calls have 30 days remaining. They're selling for .93 apiece, an IV of 37%.

    The following Tuesday, when the market opens next, there will be 26 days remaining. Let's imagine that with 26 days remaining and 37% volatility, those same calls will be worth .89 apiece.

    So the last hour of trading on Friday, those xyz 90 calls lose 4 ticks, and close at .89. Really, that's the market anticipating 4 days of time decay, and when the market opens on Tuesday those calls will still be trading at .89, so IV will still be at 37%.

    But if you calculate the IV at the close on Friday using 30 DTE, it will APPEAR that those calls' IV has dropped. It's an illusion though - "synthetic time" as rallymode called it. It's time decay masquerading as a drop in IV. So you can't really play it.
    #10     Apr 9, 2009