VIX Reflecting Skepticism About Rally

With the S&P 500 index up 4.3% and the VIX down 9.3%, it was clear that there was a fairly substantial disconnect at the moment between those who are buying stocks and those who are trading options on the SPX.  The picture is even more dramatic if you look at the upward trend in both the SPX and the VIX after the open.  An intraday chart of the S&P 500 is not ideal for deciphering the relative movements, but the unusually high correlation between stocks and implied volatility was unmistakable when looking at yesterday’s intraday price action.

With the VIX typically moving about 4x as rapidly in the opposite direction of the SPX under ‘normal’ market conditions, it appears as if many investors are skeptical about stocks continuing to rally in the face of ongoing uncertainty about the Europe-driven news cycle.  Following an initial pop, the euro sold off and after it dropped into the 27s, the VIX was content to remain above 28 for the balance of the day, the bullish action in stocks notwithstanding.  One simple explanation:  investors snapped up options, including put protection, at what looked to them like bargain basement prices.