Can someone explain why the vix went down on march 20th and 23rd while the indexes went lower on those days. Usually, the vix would rise as the index sells off hard. Of course, in retrospect, this divergence signaled the intermediate term bottom. Is this something that happens often? If one were long OTM put options and wanted to optimize exit, if the above pattern holds, we would want to get out of the options even as the market is rolling over at some point because the market will continue to roll over but the options would decrease in value..... signalling an intermediate term bottom. I would like to exit before this happens to optimize the gain in options but not sure how. Any ideas? TIA
It happens maybe once a decade(market down +2% daily and Vix down for day). Earlier this week market was up 1% and vix was up btw
The market was saying the implied volatility was overextended on those two days. The reverse occurs as well -- look at 5/29 to 6/1. You may want to observe term structure more closely to detect early changes in direction of IV, as this can sometimes be helpful.
Actually at that time people were asking how is it possible for VIX to stay that high for so long. I think it’s already beaten a few records at that time, so that was unusual, while what you’re stating (VIX dropping) was more than expected. VIX doesn’t need to move in opposite to SPX, and they aren’t in sync often enough to not be predictable, and for volatility trading hedge funds and strategies to go out business during such times. While VIX is simply a measure of the price of insurance, so when you think of it, how much more would you pay for life and health insurance as you get older and older? At some point the insurance would be so expensive you’d die sooner from the stress and poverty than from not having an insurance. It’s really no different with VIX, VIX becomes less useful once everyone loads up on insurance so much that they simply no longer need it, or once it is way more expensive than anyone’s willing to pay.
Btw, why are you looking at VIX if you want something that moves inverse to SPX? There are plenty of ETFs that do that.
Markets price on expectations. VIX is about uncertainty. They are often in opposite directions, but not deterministically so -- and it is often possible to have climbing prices and climbing volatility, too. Stepandfetchit mentioned "term structure": break that VIX down and you'll get the time window that concerns the market.
The VIX cash was printing close to all-time highs of 80+ during those 2 dates. It had no choice but to come off, given that it was probably priced at a significant premium to realized. Also, VIX calculation is heavily weighted toward the OTM SPX puts. If you're long the VIX you're also long SPX put skew. It looks like "smart" paper was calling the bottom and slamming put wings those 2 dates, which flattened the SPX curve big time, and made the VIX collapse regardless of direction or market vol.