the vix behavior in Bull and bare markets we're going to take a look and see what the vix does it has this the vix has this inverse relationship to whatever happens in um Market the snps and we're going to see and take a look and see how that kind of plays out over time so on average the vix has a very strong negative correlation with the S&P 500 but we also know that in Market downturns the magnitude of the moves in the market and the vix increase so what is the difference in magnitudes of moves
in different Market environments and what can Traders do with this info because sometimes it works and sometimes it don'tuh okay most of the time it does but how much of the time doesn't it actually work and how confusing is that and all that kind of stuff we're going to take a look at everything today so we looked at the last five years because I think for the vix and the snps five years is a little more relevant and we computed the average and go time the less relevant it is yeah yeah yeah I mean the
last 5 years we've had plenty of moves we've had a pandemic we've had crazy you know record highs Felts like every year we've had one selloff in 2022 so we computed the average and the standard deviation of average vix moves during spy up days and down days and we did it separately and then we computed the conditional probabilities of the vix and the Spy movements you're going to see some fun little stats here so the average move magnitude in the vix is 45% more when the Spy is down and it has a 75% higher variance
of moves so when the Spy is up let's say today the Spy is up a little bit the vix tends to move less with a tighter range of moves I don't think that would surprise anybody no when Market's up the vix moves less and it contracts when it's down the vix um has a greater magnitude of the move so we'll take a look here so any vix move on any day um and we looked at up days and then spy down days which I think is pretty fair um 3 point three and per on up
dayss and 5.1% on down days that's the mean vix move and then the volatility of vix moves is significantly higher on down days than up days and on any day it's plus or minus 88.5% what's really interesting about this is it it just explains why there's put skew in the index products and it also explains why we spend so much time talking about hey when you have a beta weighted position we like to keep a little bit of short Delta because if protects against those um the volatility in the market on those on those down
days that's all it is the Market's more volatile than those down dayss gives you a little bit more protection that's that's that's it that's all it does a little bit of short when you're following the market right sometimes a lot of NASDAQ stocks that you trade the volatility actually go up as the stock goes higher too so you know you got to be a little careful make sure you're in the product I know we're talking about S&P right here yeah we're talking about S&P right now using conditional probabilities we can expand on this concept and
say that there's a 21% chance that when the market is up the vix is also up and a 27% chance that when the market is down the vix is also down this is what confuses people because how can the market be up when the vix is up and how can the vix be up with the Market's up and how can the vix be down when the Market's down so there are those times this is what we call keeping people honest okay that this is what does it keeps you honest like well today is probably today's
today's a tough one because it's Market's basically Market's mix you got &p Mi vix is only down a couple pennies and the Market's up a little but a minute ago it was down so it's hard it's kind of hard to say um but I just wanted to point this out because sometimes like we'll sit here and we'll go why is the market down and the vix is down or why is the market up and the vix is up well 21 and 27% of the time that's going to happen so let's just say 23 24 %
of the time you know just under one quarter of the time that's going to happen so it's not that weird is my point so the probability that the vix goes down when the market goes down is actually the same as the probability that vix goes up when the market goes up this is another reason why we like to be short of little Delta to hedge against the down moves the market what I said before since the chance of a double whammy vix up and Market up it's 21% and the chance of both going in our
favor is 27% our hedge will work the same amount if it doesn't but it serves to reduce overall risk in a portfolio it's a crazy way to look at how to keep and track your overall position because all you're trying to do is take advantage of a very small mechanical edge with the vix being down chance of them both going in our favor vix down marketown as opposed to vix up market up and what to expect too like you know if the market goes lower and you have a position like this and you make money
having a little bit of long Delta on it it's because volatility raed or expanded to fit your position so you know it's not always about the Delta it's also about the volatility right but what what what what these guys are saying researchers here is that it's 21 vers 27% so there's a little tiny bit of edge to keeping maintaining a little bit of short Delta that's all it is because 27% of the time as opposed to 21% of the time it works in your favor I'll take whatever Edge I can get let's go to the
next slide so some of the takeaways on average when the market goes up the vix goes down but with less magnitude than when the market moves down and the vix moves up I there's a lot of offsetting stuff here but since the probability of Vick's going down when the Spy goes down is larger than the probability of Vick's going up when the Spy goes up our short Delta hedge will work around the same amount of time as it doesn't the the difference is that we have to remember is that the market goes up more than
it goes down so you you you have way more three% of the time is that the number well no it's higher than that now higher it's higher than that it's every day now I mean but I'm just going over to time well it's higher than that for the last couple years it's been closer to like 60 40 MH or 58 42 whatever it is but so so that's what offsets it because there's always something symmetrical that comes out but anyway that's why we maintain a little bit of short Delta that was always our thought process
and know now you know why we now you know why we kind of wrote The Mechanics the way we we built the mechanics the way we did them would you skew at Eliz a little bit for stocks that don't have have an inverse relationship to the market
