A Guide to VIX vs. SPX Correlations and Managing Risk
The Chicago Board Options Exchange (CBOE) developed the VIX in 1990 to serve as a benchmark for predicting future stock market volatility. It's a real-time indicator that represents market participants' volatility predictions for the following 30 days. They built the VIX index using weekly and conventional SPX index options, as well as their implied volatility levels, at the most basic level. We may think implied volatility of as expected volatility based on market participants' behavior in the options market. Understanding why the VIX moves in the opposite direction of the S&P500 is crucial since the volatility index serves as a gauge of market emotion, thus the name "fear barometer."
What's the big deal?
In negative stock market conditions, the S&P500 VIX increases, whereas in bullish stock market environments, it decreases or stay constant. This is because of the stock market's long-term bullish tilt and the fact that we compute the VIX using implied volatility.Implied volatility rises when there is high demand for options, which usually occurs during SPX price drops as market players (who are collectively positive) rush to purchase portfolio protection (put options). When the S&P500 rises, demand for protection falls, and the VIX falls. This trend has likely been worse in recent years as the VIX has developed from a market measure of volatility to a tradable asset class of product offerings on different futures, stocks, and options exchanges.
The S&P500 VIX correlation is simply the relationship between the S&P500 and the VIX. I may see the significant negative connection between the stock market and the VIX in the graphic above. When the stock market falls, the index rises. The connection between daily fluctuations in the S&P500 and the VIX has been -77 percent since the VIX's inception in 1990. The negative correlation has become even stronger over the last ten years, now standing at -81 percent, up from -74 percent prior to October 2008.
The closer connection may be because of the many products that have been formulated over the last 10-15 years that enable market players to trade the VIX. Since previously said, this would also explain why we are witnessing bigger jumps in the VIX when the market declines, as VIX trading causes exaggerated movements in implied volatility.
The connection between Chicago Board Options Exchange (CBOE) developed the VIX in 1990 to serve as a benchmark for predicting future stock market volatility. It's a real-time indicator that represents market participants' volatility predictions for the following 30 days. They built the VIX index using weekly and conventional SPX index options, as well as their implied volatility levels, at the most basic level. We may think implied volatility of as expected volatility based on market participants' behavior in the options market. Understanding why the VIX moves in the opposite direction of the S&P500 is crucial since the volatility index serves as a gauge of market emotion, thus the name "fear barometer."
What's the correlation between the two?
In negative stock market conditions, the VIX increases, whereas in bullish stock market environments, it decreases or stay constant. This is because of the stock market's long-term bullish tilt and the fact that we compute the VIX using implied volatility. Implied volatility rises when there is high demand for options, which usually occurs during S&P500 price drops as market players (who are collectively positive) rush to purchase portfolio protection (put options). When the S&P500 rises, demand for protection falls, and the VIX falls. This trend has likely been worse in recent years as the VIX has developed from a market measure of volatility to a tradable asset class of product offerings on different futures, stocks, and options exchanges.
The SPX VIX correlation is simply the relationship between the S&P500 and the VIX. I may see the significant negative connection between the stock market and the VIX in the graphic above. When the stock market falls, the index rises. The connection between daily fluctuations in the SPX and the VIX has been -77 percent since the VIX's inception in 1990. The negative correlation has become even stronger over the last ten years, now standing at -81 percent, up from -74 percent prior to October 2008. The closer connection may be because of the many products that have been developed over the last 10-15 years that enable market players to trade the VIX. Since previously said, this would also explain why we are witnessing bigger jumps in the VIX when the market declines, as VIX trading causes exaggerated movements in implied volatility.
The connection between the S&P500 and the VIX has been constant and dependable throughout time. Over the last ten years, the rolling 1-year correlation between daily changes has averaged approximately 83 percent, remaining within a very narrow range of -70 percent to -90 percent. And the VIX has been constant and dependable throughout time. Over the last ten years, the rolling 1-year correlation between daily changes has averaged approximately 83 percent, remaining within a very narrow range of -70 percent to -90 percent.
What's the big deal?
In negative stock market conditions, the S&P500 VIX increases, whereas in bullish stock market environments, it decreases or stay constant. This is because of the stock market's long-term bullish tilt and the fact that we compute the VIX using implied volatility.Implied volatility rises when there is high demand for options, which usually occurs during SPX price drops as market players (who are collectively positive) rush to purchase portfolio protection (put options). When the S&P500 rises, demand for protection falls, and the VIX falls. This trend has likely been worse in recent years as the VIX has developed from a market measure of volatility to a tradable asset class of product offerings on different futures, stocks, and options exchanges.
The S&P500 VIX correlation is simply the relationship between the S&P500 and the VIX. I may see the significant negative connection between the stock market and the VIX in the graphic above. When the stock market falls, the index rises. The connection between daily fluctuations in the S&P500 and the VIX has been -77 percent since the VIX's inception in 1990. The negative correlation has become even stronger over the last ten years, now standing at -81 percent, up from -74 percent prior to October 2008.
The closer connection may be because of the many products that have been formulated over the last 10-15 years that enable market players to trade the VIX. Since previously said, this would also explain why we are witnessing bigger jumps in the VIX when the market declines, as VIX trading causes exaggerated movements in implied volatility.
The connection between Chicago Board Options Exchange (CBOE) developed the VIX in 1990 to serve as a benchmark for predicting future stock market volatility. It's a real-time indicator that represents market participants' volatility predictions for the following 30 days. They built the VIX index using weekly and conventional SPX index options, as well as their implied volatility levels, at the most basic level. We may think implied volatility of as expected volatility based on market participants' behavior in the options market. Understanding why the VIX moves in the opposite direction of the S&P500 is crucial since the volatility index serves as a gauge of market emotion, thus the name "fear barometer."
What's the correlation between the two?
In negative stock market conditions, the VIX increases, whereas in bullish stock market environments, it decreases or stay constant. This is because of the stock market's long-term bullish tilt and the fact that we compute the VIX using implied volatility. Implied volatility rises when there is high demand for options, which usually occurs during S&P500 price drops as market players (who are collectively positive) rush to purchase portfolio protection (put options). When the S&P500 rises, demand for protection falls, and the VIX falls. This trend has likely been worse in recent years as the VIX has developed from a market measure of volatility to a tradable asset class of product offerings on different futures, stocks, and options exchanges.
The SPX VIX correlation is simply the relationship between the S&P500 and the VIX. I may see the significant negative connection between the stock market and the VIX in the graphic above. When the stock market falls, the index rises. The connection between daily fluctuations in the SPX and the VIX has been -77 percent since the VIX's inception in 1990. The negative correlation has become even stronger over the last ten years, now standing at -81 percent, up from -74 percent prior to October 2008. The closer connection may be because of the many products that have been developed over the last 10-15 years that enable market players to trade the VIX. Since previously said, this would also explain why we are witnessing bigger jumps in the VIX when the market declines, as VIX trading causes exaggerated movements in implied volatility.
The connection between the S&P500 and the VIX has been constant and dependable throughout time. Over the last ten years, the rolling 1-year correlation between daily changes has averaged approximately 83 percent, remaining within a very narrow range of -70 percent to -90 percent. And the VIX has been constant and dependable throughout time. Over the last ten years, the rolling 1-year correlation between daily changes has averaged approximately 83 percent, remaining within a very narrow range of -70 percent to -90 percent.
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