SPY and VIX: A look at the 2008 Financial crisis
How is the VIX priced? If you look up the equation that the CBOE uses to calculate the VIX, you'll see it's based on SPX OTM derivatives dated 30-days out. The more the strike prices for these derivatives fluctuate, the VIX should increase.
If you think about it, the reason why the VIX generally represents the inverse of SPX during times of uncertainty is that sellers and buyers are now less sure how to price options. With huge influx of buy and sell orders, you can expect strike prices to go up and down at a rapid pace. However, after this point, the VIX is not an "inverse of SPX." As you can see, after the initial crash in 2008, we see that the volatility in VIX is the highest. By Dec 2008, we see that SPY has leveled off fluctuating between $80-95, but the VIX continues to drop precipitously during this time. We had a better grasp of the economic situation, and derivative pricing stabilized. Once VIX fell by Jan 1, 2009, it never really recovered back even close to the second peak 5 weeks prior. Despite SPY continuing to fall close to 30% by March 2009, VIX stayed roughly the same price.
SPY returned to its September 2008 price close to April 2010. Let's look at the context for this recovery:
- By the end of the financial crisis, unemployment rose to 10%. The volume of applications for unemployment benefits was 10x what we are seeing today.
- Jobs lost during this time were decent paying, high-wage jobs. Many of the displaced workers sought part-time work that current service industry workers have been laid off or furloughed from.
- This was a housing crisis. Millions of Americans lost their homes. This coronavirus will not come anywhere close to this figure in terms of the number of homeless in America.
- The stimulus package was about
1T at the time.
Now if we look at today:
The point where VIX has passed the volatile phase was sometime around end of March. This means that traders are pricing derivatives with greater confidence, and we also see a concurrent increase in buying/selling ratio.
I expect SPY to fall again for (which I have secured a short position), but ultimately, we will slowly see recovery in SPY. I would not suggest short-term options. I have been accumulating calls dated for January 2021, because I am confident that once this coronavirus is over, the economy will respond.
In conclusion, I don't think this virus is going to cause an economic apocalypse. I think the fear is already receding as evidenced by the VIX, and I believe that the recovery will be faster than the financial crisis of 2008.
If you think about it, the reason why the VIX generally represents the inverse of SPX during times of uncertainty is that sellers and buyers are now less sure how to price options. With huge influx of buy and sell orders, you can expect strike prices to go up and down at a rapid pace. However, after this point, the VIX is not an "inverse of SPX." As you can see, after the initial crash in 2008, we see that the volatility in VIX is the highest. By Dec 2008, we see that SPY has leveled off fluctuating between $80-95, but the VIX continues to drop precipitously during this time. We had a better grasp of the economic situation, and derivative pricing stabilized. Once VIX fell by Jan 1, 2009, it never really recovered back even close to the second peak 5 weeks prior. Despite SPY continuing to fall close to 30% by March 2009, VIX stayed roughly the same price.
SPY returned to its September 2008 price close to April 2010. Let's look at the context for this recovery:
- By the end of the financial crisis, unemployment rose to 10%. The volume of applications for unemployment benefits was 10x what we are seeing today.
- Jobs lost during this time were decent paying, high-wage jobs. Many of the displaced workers sought part-time work that current service industry workers have been laid off or furloughed from.
- This was a housing crisis. Millions of Americans lost their homes. This coronavirus will not come anywhere close to this figure in terms of the number of homeless in America.
- The stimulus package was about
1T at the time.Now if we look at today:
The point where VIX has passed the volatile phase was sometime around end of March. This means that traders are pricing derivatives with greater confidence, and we also see a concurrent increase in buying/selling ratio.
I expect SPY to fall again for (which I have secured a short position), but ultimately, we will slowly see recovery in SPY. I would not suggest short-term options. I have been accumulating calls dated for January 2021, because I am confident that once this coronavirus is over, the economy will respond.
In conclusion, I don't think this virus is going to cause an economic apocalypse. I think the fear is already receding as evidenced by the VIX, and I believe that the recovery will be faster than the financial crisis of 2008.
כתב ויתור
המידע והפרסומים אינם אמורים להיות, ואינם מהווים, עצות פיננסיות, השקעות, מסחר או סוגים אחרים של עצות או המלצות שסופקו או מאושרים על ידי TradingView. קרא עוד בתנאים וההגבלות.
כתב ויתור
המידע והפרסומים אינם אמורים להיות, ואינם מהווים, עצות פיננסיות, השקעות, מסחר או סוגים אחרים של עצות או המלצות שסופקו או מאושרים על ידי TradingView. קרא עוד בתנאים וההגבלות.