A lower close in the SPX today would be the 7th in a row. Implied Volatility (IV) has risen. This is not surprising as all tastylivers should be aware of the high negative correlation between the S&P 500 and the VIX. There are times though when the VIX rises in a quiet, flat market. Is this an indicator of future market direction?
A graphic showed that since 2004 both the S&P and the VIX were up together 9% of the time and 8% of the time the S&P and the VIX were down together. The negative correlation holds 87% of the time. When the VIX rises and prices are flat, some traders believe that something will happen. They perceive future volatility in prices. What do the numbers show?
A final graphic showed that no matter what the market environment positive drift was more powerful than any market indicator. The following 45-day average move in the SPY was up no matter what the combination of the SPY and VIX was. That tells us that a rising VIX is not predictive of future Volatility.
Tom noted, “What this means is you should always be short premium. If you are going to take any risk, you are best off living with the risk of short premium. The only way to protect yourself against that risk is by having some short Deltas.
For more information on the SPX & VIX see:
Market Measures on March 22, 2016: “Relationship Between SPX and the VIX”
Options Jive from April 26, 2016: Volatility Environment: Market Moves”
Market Measures from June 17, 2016: "Fading Fear | Trading After Large VIX Movements"
Options Jive from July 26, 2016: "Comparing Movements in SPX and the VIX"
Watch this segment of Options Jive with Tom Sosnoff and Tony Battista to learn if the VIX rises in a flat or up market is this indicative of future volatility in prices?
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