It's no secret that VIX, aka "investor's fear gauge," is the volatility index that goes up when uncertainty increases in the market. It functions to predict and hedge against the upcoming volatility. So its negative correlation with major indexes is no surprise.
Now, how traders expect volatility? When traders see a major sell-off or a massive demand in call or put options. Meaning, the option sellers see higher demand, and options buyers see increased options premium, which is a signal of increased market risk and volatility. As the result, investors seek ways to "hedge" their positions through investing in the VIX index or buying an opposite position leading to a spike in VIX.
Does that mean when there is a spike on VIX, we should also expect a rise in speculative/growth stocks? Sometimes.
Let's take a look at this chart. On top of the panel we have a fairly volatile ticker (SPCE) and on the bottom, we can see the VIX chart (white line). As you can see, for every move, larger than 50%, on VIX, we have seen a relatively large price movement within a month or two after the spike. Is this a coincidence?
Please feel free to share your thoughts and add to my explanations for a better collective learning experience.
Thanks
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Above, I mentioned that a spike on VIX does not always contribute to an upside movement. An example of that should be the spike on January 27th. Although we saw a rally for +28% on SPCE, the downside following the spike was relatively more predominant.
I forgot to add that in this chart, but the key takeaway is that a spike on VIX could lead to either an upside or downward movement. The direction of price action has to take into account the condition of the stock and other technical indicators.
For example, is the stock oversold or overbought? Is it on a downtrend or uptrend? How long this up/downtrend has been going on? How far is the price relative to 50 and 200 MA? Do we expect to see some sort of correction to the trend?
In our example, SPCE was oversold on three of these VIX spikes so the price moved almost +100% every time. On January 27th, however, the company was overbought and a correction was expected one way or the other.
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FAQ: 1- Is this a proven fact or a reliable indicator? No, this is a hypothesis that has not been explored academically. The question is whether overall market volatility leads to snapbacks and increased risky behavior, especially in the speculative stocks within a couple of months of the VIX spike.
2- Why VIX, why not RVX? Most market volatility stocks are tightly correlated. Using VIX as an overall market volatility indicator is standard practice.
3- Are you implying VIX spike means people are buying speculative stock options? No. Ticker's specific volatility measure is determined by the Implied Volatility of that ticker for each strike price. We are using VIX as a volatility indicator of the entire marketplace.
4- So what is your main point then? Let me rephrase my hypothesis. There are many studies conducted on the effect of fear on risk-taking behaviors (pubmed.ncbi.nlm.nih.gov/32116122/). So my theory is that when the market is volatile, people may take risker positions and the snapback could manifest itself in higher magnitudes on speculative stocks. This effect seems to be taking a couple of months to fully reveal itself.
Since some of the "meme" stocks are in the Russell 2000, there's probably a better relationship between RVX (the volatility index for the Russell) than using the VIX, which is descriptive of implied volatility in SPX options. This is probably why IWM 30-day implied volatility is 22.9% here and SPY's a paltry 16.2%. (RVX finished Friday at 22.82; VIX, 16.42). That being said, SPCE is neither a member of the S&P 500 nor the Russell 2000, so the relationship between broad market volatility and SPCE price action is more attenuated here than, for example, AMC or GME, which are both in the Russell 2000. Each underlying has its own individual implied volatility (its unique "VIX" if you will), so one should look at the specific underlying's IV for a determination of whether to enter a trade using an uptick in implied volatility as a potential trading signal. Unfortunately, there's no current way to chart, for example, SPCE 30-Day IV in TV, and SPCE doesn't have its own individual volatility index as a few other instruments do (e.g., GVX -- gold volatility, OVX -- crude volatility, VXAZN -- AMZN volatility). Most brokers options platforms should show you (a) strike specific IV; (b) expiry-specific IV; and (c) 30-day IV, so it's not like anyone should be in the dark as to how a given stock's IV is behaving, either relative to itself or relative to the broad market. Additionally, VIX is relatively quiet here while SPCE 30-Day IV is not; it was 133.4% as of Friday close -- nearly 8 times as "frisky" as the broad market was. Consequently, VIX levels here won't be nearly as informative as looking at SPCE's individual IV in determining whether to pull the trigger on something in SPCE.
Realamh
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@NaughtyPines, Thank you for your comment. VIX, VXO, VXN, RVX, and VXD are all closely correlated with each other and that's a well-researched topic. So, many traders only use VIX to evaluate overall market "fear" and that's a common and accepted practice. Ticker-specific IVs are also too specific and do not give any information about the increased volatility of the marketplace as a whole. I am interested in finding out whether increased VIX has any correlation with riskier behavior and higher bets on speculative tickers down the line, not that VIX goes up because traders buy more calls or put options on a specific ticker because that's what IV indicates, as you also mentioned. Any academic research on this topic would be interesting.
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shaze90
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I called GME the vix indicator while I invested in GME BBBY and many other retail such as GAP ANF GES on the grounds of under valuation considering future prospects of spending from stimulus. I will say meme stocks are the vix but even that is diverging imo.
coppermapeshoane03
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I'm really concerned fam , which vix are we really talking about ? is it VIX 75 from deriv broker or vix from other currency brokers???