If you are new to tastytrade or have not yet picked up on it, volatility is essential to our particular style of trading. We are always looking for ways to compare what the market is doing in terms of price with how volatility is responding. Therefore, we looked at a comparison between movements in SPX and changes in VIX.
Prior to this study, we typically used a 20:1 ratio to describe the SPX:VIX relationship. For every 20 point move in SPX, we expected about a 1 point move in VIX. It is a quick reference for us. However, we wanted to understand how a 1% move in SPX translates to VIX.
One thing to understand about VIX, and this confuses Bat still, VIX is expressed as a percent. VIX represents the expected range for SPX. Therefore, we did not look at a percent change in SPX vs. a percent change in VIX because the results would not provide anything actionable. Rather, we compared a 1% change in SPX to a 1 point change in VIX.
The following formula was used for our study:
Change in VIX
As an example, if the SPX return was -4% and VIX was +5 points in that same time, the ratio would be: 5 / (-4) = -1.25.
Below is a table with VIX/SPX ratios:
Over time, we see the ratio hovers right around -1.00. In other words, VIX and SPX are inversely correlated such that a move down in SPX of 2%, as an example, tends to results in a +2 point move up in VIX.
Understanding the relationship between percent changes in SPX and point changes in VIX is as important to us as water. We often use trading strategies requiring assumptions in changes in volatility relative to the market. Also, we can use this information to compare changes in SPX to changes in VIX as a way to confirm market action.
Josh Fabian has been trading futures and derivatives for more than 25 years.
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