VIX and SPX not Moving In Sync
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While the SPX was up big today, traders may have reasons to fear continued turbulence in the markets, at least in the near term. The main reason is the VIX. While the VIX was down today, as many traders might expect, there is a problem with the amount the index was down. It did not keep up with the SPX. On a day the SPX is up 1.5%, the VIX should be down close to 10%. The VIX was down about half that amount.
Over the last few days, we can see a troubling occurrence in the SPX and VIX relationship. The two are not negatively correlating the way traders want to see. The SPX is up, while the VIX is not down nearly as much as one might expect. Take a look at this comparison of SPX to SPX IV.
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Notice the slow creeping up of IV with the market. Any type positive correlation in SPX and VIX is typically considered to be very bearish. However, this is not for certain; there could be another culprit in today’s action…realized volatility.
As we stated, the SPX was up close over 1.5%. This equates to a one day volatility of about 24%. If we consider the VIX closed at just over 18%, this would mean that traders are anticipating the index slowing down at least some. The truth is, if I was a floor trader on a day the market is really moving, I am not sure that I would want to be short gamma in a situation like this. That could be a major reason that traders were not unloading VIX.
The trade I might want to do is the short time spread, which would get me long gamma and short vega. This could explain why the VXV was down more than the VIX itself. The VIX was down 1.09, the VXV was down closer to 1.20, small but not insignificant.
If the market moves less than 1% tomorrow, the VIX is going to get torched. I believe this is highly likely to happen and could set up early put spread (credit spread) opportunities for traders in the near future.
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