VIX and SPX not Moving in Sync

Posted April 18th, 2012 by Mark Sebastian in Trading & Analysis

VIX and SPX not Moving in Sync

While the SPX was up big yesterday, 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 yesterday 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.

In face 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.

Livevol www.livevol.com

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 todayís actionÖrealized 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.

The Trade

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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Mark Sebastian is the Director of Eduction for Option Pit, and a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. He is co-host of "Option Block," the wildly popular show on The Options Insider Radio Network.

He has been published in nationally on Yahoo Finance, quoted in the Wall Street Journal is a featured contributor for TheStreet.com. He also writes regularly for SFO, and OptionsZone, and is the managing editor for Expiring Monthly: The Option Traders Journal.

To learn more about Option Pit and its mentoring services, please visit OptionPit.com

About Mark Sebastian

Mark Sebastian is a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. Along with his role directing the path of education for Option Pit, Mark is currently the director of risk for a private hedge fund. He writes a daily blog, the Option Pit blog, formerly Option911. Sebastian has been published nationally on Yahoo Finance, Google finance, Financial Times Alphaville and is a featured contributor for TheStreet.com. He is also published regularly at SFO, the Options Insider, and is one of the Co-Hosts of The Option Block Podcast, a featured Podcast from Options Insider Radio. Mark is the managing editor for Expiring Monthly: The Option Traders Journal. Sebastian has a Bachelor's in Science from Villanova University. To learn more about Option Pit and their mentoring services, please visit: http://www.optionpit.com

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