Schaeffer's Trading Floor Blog

Are Volatility Expectations Waning?

The near-perfect inverse correlation of the SPY and VIX

by 4/25/2014 7:08 AM
Stocks quoted in this article:

As we noted yesterday, India stocks and the India VIX are moving in about a 0.5 correlation to each other lately. How odd is that?

Well, glad you asked. I looked at the SPDR S&P 500 ETF Trust (SPY) vs. our CBOE Volatility Index (VIX) from the beginning of 2010 up until last Friday, and they moved with a negative 0.81 correlation. So, yes, moving at 0.5 is a huge outlier.

But enough about Indian VIX!

Over here, that negative 0.81 correlation is on the high side. I mean, last I checked, it can go to only negative 1, so that's pretty close to a perfect inverse relationship. It's higher than the long-term correlation of about negative 0.65, though that number is skewed a bit by the late-'90s tech bubble, as volatility trended up alongside stocks.

This all has real-world investing implications. All VIX derivatives are basically marketed as portfolio hedges/leveraged bearish bets. The best-fit line multiple on data since 2010 is negative 5.77, meaning for every 1% drop in the market, VIX lifts roughly 5.77%.

And that sounds great, right? All you need is a 1% dip in SPY if Putin goes to the Ukrainian border; we could blip down 1% before he even gets his shirt off and you're up 5.77%.

Well, unfortunately, VIX derivatives don't work exactly like that. As we note early, late, and often, the futures are many steps ahead of us. Here's how the term structure looks now:

VIX Futures Term Structure since May
Chart courtesy of

So, that average 5.77% pop in VIX might not translate into that big of a pop in VIX paper, seeing as the futures are already anticipating VIX pops out in time. Of course, you could have bought CBOE Short-Term Volatility Index (VXST) options, or near-month VIX futures -- the only catch is that you have to time those very well, otherwise your paper will expire before you catch that VIX move.

As I've said many times, there's no particular reason why the market should always assume a VIX rally is in the offing. But at least the curve is gradually flattening. Here's how it looks now vs. how it looked as the year began.

VIX Futures Historical Prices in 2014
Chart courtesy of

It's not much. But hey, we've moved somewhat violently within a relatively tight market range, and assumptions of future volatility have actually tapered. So we have that going for us!

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

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