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The Close Relationship of VIX and SPX


Implied and realized volatility are connected, but not beholden to each other.

Even with the late dip in the VIX, it still acted pretty well yesterday. And it remains high in general.

High you say?

Well, yes. When compared to actual volatility of the SPX (realized volatility).

Ryan Renicker of NewEdge Group ran this chart, with the following description: "This is the ratio of the VIX divided by the 20 trading day realized volatility for the S&P 500 Index. The last time it reached such extreme (high) levels was in mid-January of this year."

Click to enlarge

Now of course, implied volatility and realized volatility are related, but not beholden to one another. Implied looks forward -- standardly, 30 calendar days unless otherwise noted -- and tells us what the market expects to see in terms of volatility of the underlying. Realized (also Historical, or HV) looks back in trading days and tells you how volatile the underlying has actually been. A 22-day look back is roughly equal to 30 calendar days, so many use a 20-day HV reading to equate to the VIX. But there's no particular reason they have to use the same length of time. I often also go with a 10-Day HV number. It's noisier, but I'm just looking at it for the here and now.

Even though IV and HV can move in opposite directions, they correlate pretty strongly. In fact, Implied Volatility does a better job simply reflecting recent HV than it does predicting future HV. In other words, options markets are less smart than they are capable of feeling volatility now and projecting it for the next month.

So yada yada yada, it's quite relevant to look at recent Realized Volatility. And through that lens, options are on the fat side right now.
No positions in stocks mentioned.
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