XIV did great in 2017, but so far this year it has greatly underperformed what a 3-4 beta to the S&P 500 would predict. I though the prospect of a government shutdown was causing underperformance, but even with that averted, it has done poorly relatively considering the environment of low realized volatility with an upward drift. Is it concerns about a trade war? The Trump administration has recently imposed some tariffs. Of course, the market does not answer questions about what it does, but I am wondering what is going on.
Interesting explanation, thanks. But the correlation of VIX and SPX changes is about -80%, so usually SPX increases are accompanied by VIX drops. Why is the effect you suggest stronger now than it usually is?
VIX is rather part art, part science. and it's kind of a stale backwards-looking measure...of potential things to come. Nothing really in the market is an exact measure or correlation of something...it's rubberbands and bubblegum. not rope or string, that doesn't stretch. 2018 is relatively much more complacent and tame and normal and expected environment...compared to the new, weird, wild 2017 was during Trump's first year in office. It's like spilling marbles all over the place, the initial drop is crazy and wild. I hope that explanation and wisdom made everything crystal clear for you. -- and you now become rich.
Today the WSJ has an article on this topic: https://blogs.wsj.com/moneybeat/2018/01/26/is-volatility-back/ Is Volatility Back? In an unusual occurrence, the VIX has moved the same direction as the S&P 500 on over half of trading days this month By Gunjan Banerji Jan 26, 2018 8:39 am ET ... In an unusual occurrence, the VIX has moved the same direction as the S&P 500 on over half of trading days in January. The VIX has risen 4.9% this year and closed Thursday at 11.58, while the S&P has jumped 6.2%, in its best start for any year since 1987, according to The Wall Street Journal’s Market Data Group. ... Some attribute the moves to investors springing for bullish call options on the S&P 500 in an effort to keep up with the stock-market rally.
Today (Jan 26) the SPY was up 1.15% but XIV fell 0.64%, again departing from the usual positive correlation. Here is an article from Reuters on this topic. https://finance.yahoo.com/news/u-stocks-vix-dance-tandem-break-history-210658736--sector.html U.S. stocks, VIX dance in tandem in break with history By Saqib Iqbal Ahmed January 26, 2018 NEW YORK (Reuters) - A rising U.S. stock market normally reduces fear among investors, but the blistering pace of the current rally has instead also driven up the anxiety factor in the market. The S&P 500 Index and the Cboe Volatility Index, which is the main gauge for measuring investor fears that benchmark stocks will drop in the near term, have moved in rare tandem form. On nine separate occasions this month, the VIX has matched the direction taken by the S&P 500 on a given day. That marks the most times these two measures have moved concurrently in the same direction in all but two months over the last five years. The VIX is derived from the price of S&P 500 options. When stocks fall, investors rush to buy protection and drive up the level of the VIX. Not so this year. Even though the S&P 500 has risen 4.7 percent over the last three weeks, the VIX has gained more that 2 points. "Even though the SPX has gone up, because it has gone up in such a parabolic fashion the VIX has gone up as well," said Stephen Aniston, president of investment adviser Black Peak Capital, in Connecticut. In recent months, U.S. stocks have steadily climbed, taking benchmark indexes to new highs, with nary a sign of volatility. This led some investors to sell S&P 500 call options, on the belief that the rally would lose steam. By selling an index call the seller takes on the obligation to sell the value of the underlying index at a fixed price in the future. Stocks' rapid 'melt-up' this year has left these call sellers in a weak spot and they have been forced to buy calls to cover their short position, analysts said. This buying of S&P 500 calls tends to boost the VIX even as the market rallies, analysts said.