Is there a correlation between VIX and speculative stocks?

3 มิ.ย. 2021

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

4 มิ.ย. 2021

บันทึกช่วยจำ

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.

7 มิ.ย. 2021

บันทึกช่วยจำ

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.