VIX Correlation

You cannot buy VIX itself - it's just an index. However, you can trade VIX futures, VIX options, and VIX-linked ETPs (like VXX, UVXY). UK traders may have restrictions on some VIX ETPs due to regulations. Alternatively, use FTSE options to express volatility views.

The relationship is asymmetric due to fear psychology. When markets fall, investors panic and rush to buy protection (puts), driving up option prices and VIX. When markets rise, the fear subsides gradually. There's no 'greed spike' equivalent to fear spikes.

VIX is freely available on most financial websites and trading platforms. Search 'VIX' or 'CBOE Volatility Index'. Many platforms also show VFTSE (UK) and VSTOXX (Europe). Set up alerts for key levels like 12, 20, 25, and 30.

It depends on your perspective. High VIX means high fear and typically coincides with market stress - bad if you're fully invested. However, high VIX often marks buying opportunities and makes option selling attractive. VIX itself is informational, not inherently good or bad.

While both are volatility indices, VFTSE lacks liquid derivatives markets. There are no VFTSE futures or options that trade with sufficient volume. This is why UK traders typically use VIX products or FTSE options to express volatility views.

If VIX spikes >20% during US hours (after UK close), you have options: (1) Wait and enter FTSE at the next morning's open, (2) Use UK100 CFDs that trade extended hours, (3) Trade US instruments like SPY during US hours. Account for potential gap risk with next-day UK entry.

VIX ETPs hold VIX futures, not VIX spot. In contango (futures > spot), they must sell lower-priced expiring contracts and buy higher-priced new contracts - this 'roll cost' causes decay. Even if VIX spot is unchanged, the rolling process loses money in contango (~80% of the time).

The VIX-equity inverse correlation is statistically strong (-0.75 to -0.85) but not perfect. It can temporarily break during unusual market conditions. Also, the correlation is asymmetric - it's strongest during market declines. During slow rallies, VIX may stay elevated longer than expected.

VIX is most applicable to broad market indices. It works well for FTSE 100 due to high correlation with global markets. For individual UK stocks, VIX provides context but stock-specific factors may dominate. Consider using VIX signals for index trades and sector allocation rather than stock picking.

During genuine crises, VIX can stay elevated for months (e.g., 2008, 2020). Mean reversion still occurs but takes longer. In these cases, the usual 'sell high VIX' signal may be premature. Look for additional confirmation: backwardation normalizing, VVIX declining, equity stabilization.

Kelly criterion suggests small positions due to the asymmetric risk (many small wins, occasional large losses). Typical sizing is 2-5% of portfolio in short vol strategies. Account for worst-case scenarios (VIX to 80+) in position sizing. Never size for average outcomes alone.

Temporarily, yes. Examples: (1) Vol-specific events like Volmageddon (VIX spike without proportional equity drop), (2) Long rallies where VIX stays elevated due to hedging demand, (3) Flash crashes with delayed VIX reaction. The correlation reasserts over days-weeks, but intraday/short-term divergences occur.

Markov switching models work well for regime classification (low/normal/high/crisis). Features include: VIX level, term structure slope, VVIX, rate of change. Transition probabilities can be estimated from historical data. Challenge: regimes shift unpredictably; models lag reality.

VIX typically exceeds subsequent realized volatility - this is the volatility risk premium. On average, VIX overestimates realized vol by 2-4 percentage points. However, when realized vol exceeds implied (VIX), it's usually during crisis when VIX is already spiking. The VRP is compensation for this risk.

VIX should be one input among many: (1) Use VIX regime in asset allocation models, (2) Combine with price momentum for timing, (3) Integrate with credit spreads (another risk measure), (4) Consider in factor exposure decisions (reduce high-beta in high VIX), (5) Use in options strategy selection. VIX is informative but not sufficient alone.