relationship between VIX and indivudal es option IV

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newguy05

I was doing an experiment and tracking the VIX vs some of the es 950 call options for various back months.

It seems they dont correlate with each other at all, for example vix crashed from 70 to 55, yet the IV for es 950 call options barely moved by 1-3 points.

Without going into all the formulas, can someone explain why this is the case. Shouldnt the es option IV be somewhat linked to the VIX?

thanks
 
Thats a great question and I dont fully understand it... but I will give it a go

I think it is because the forwards in the VIX are trading lower than then the VIX cash.. this is implying that the volatility in the market will revert to the mean (lower) ... so where the VIX is trading right now isnt the best indication of IV for front month SPX options. A VIX futures that expires closer to the SPX experation is a better reference. As expiration (wed. before the 3rd friday)approaches the VIX will get closer to SPY implied and ultimately settle on the morning print based on some complex formula.
 
A better comparison would be to compare the IV of the ATM options when the vix was at 70, with the IV of the ATM options when the vix is at 55.

If you compare a strike that is way above-the-money (the 950s then) with a strike that is below the money (the 950s now), you are comparing apples with oranges.

Also, Optmarketmaker makes a good point that for the back months, the corresponding VIX futures contract should be a closer match than the cash vix. And the two have varied WILDLY recently - at one point the cash VIX was about 90, while the front-month VIX futures contract was about 55, and the next month VIX futures contract was about 47! The back-month VIX futures have been extremely stable compared to the cash VIX.
 
VIX is calculated using all the strikes, while the IV for a particular option can and will be affected by that option's demand/supply on the market. Besides, VIX is based on SPX options and not on ES options!

It's like saying that S&P 500 went up, but one of the component stocks went down.
 
Quote from dmo:

A better comparison would be to compare the IV of the ATM options when the vix was at 70, with the IV of the ATM options when the vix is at 55.

If you compare a strike that is way above-the-money (the 950s then) with a strike that is below the money (the 950s now), you are comparing apples with oranges.

Also, Optmarketmaker makes a good point that for the back months, the corresponding VIX futures contract should be a closer match than the cash vix. And the two have varied WILDLY recently - at one point the cash VIX was about 90, while the front-month VIX futures contract was about 55, and the next month VIX futures contract was about 47! The back-month VIX futures have been extremely stable compared to the cash VIX.
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DMO, actually i am pretty sure i used ATM, es was at around 950, took a wild ride and is now back to around 950. Are you saying they do correlate? meaning the IV of ATM options when VIX is at 70 will be higher than ATM options when VIX is at 55, all else being equal.

Good insight on the cash/future vix vs front/back months, but the question still remains does es option iv USUALLY correlate to the vix (cash or future).

MTE, i understand that the price is determined by supply/demand, i was just asking from people's experience is there a correlation between the vix vs es/spx option iv.
 
Quote from newguy05:

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MTE, i understand that the price is determined by supply/demand, i was just asking from people's experience is there a correlation between the vix vs es/spx option iv.
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There is correlation, but as I said, it's like comparing index's movement to the individual component's movement. They correlate, but not perfectly.
 
Quote from newguy05:

DMO, actually i am pretty sure i used ATM, es was at around 950, took a wild ride and is now back to around 950. Are you saying they do correlate? meaning the IV of ATM options when VIX is at 70 will be higher than ATM options when VIX is at 55, all else being equal.

Good insight on the cash/future vix vs front/back months, but the question still remains does es option iv USUALLY correlate to the vix (cash or future).

MTE, i understand that the price is determined by supply/demand, i was just asking from people's experience is there a correlation between the vix vs es/spx option iv.
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Newguy - if you can tell me the date you initially looked and IV was 70, and the month of the 950 calls you are looking at, I can give a more precise answer.
 
unfortunately i dont have the exact date, it was more of looking at it everyday.

But lets take yesterday-today as of now for example

1) vix cash dropped -7.2 (-13.5%)
2) vix futures dropped -6.5 (-12.5%)
3) JUN 09 950C had an IV ~39.5% yesterday if i remember correctly (the call was close to ATM ) and today has an IV of ~38.5%
4) JUN 09 1000C (ATM) has an IV of 37.5%

I know they are all connected, but i just cant map it out in my head. VIX is an index based on a basket of IV, but shouldnt IV in general rise/fall uniformly percentage wise. Here there seem to be a disconnect, for the IV i listed the drop is only 50% of the vix drop, does that mean there are other strikes that dropped 150% of the vix to balance it out?
 
Quote from newguy05:

unfortunately i dont have the exact date, it was more of looking at it everyday.

But lets take yesterday-today as of now for example

1) vix cash dropped -7.2 (-13.5%)
2) vix futures dropped -6.5 (-12.5%)
3) JUN 09 950C had an IV ~39.5% yesterday if i remember correctly (the call was close to ATM ) and today has an IV of ~38.5%
4) JUN 09 1000C (ATM) has an IV of 37.5%

I know they are all connected, but i just cant map it out in my head. VIX is an index based on a basket of IV, but shouldnt IV in general rise/fall uniformly percentage wise. Here there seem to be a disconnect, for the IV i listed the drop is only 50% of the vix drop, does that mean there are other strikes that dropped 150% of the vix to balance it out?
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I see the problem. You're comparing the cash VIX - a VERY short-term indicator - with the IV of options 8 months out. Two COMPLETELY different things.

If you want a meaningful, relevant comparison, you would have to compare June VIX futures with the IV of those June options. The June VIX futures don't really trade, so let's look at the March '09 VIX futures, which trade enough to look at them.

Yesterday the middle of the range of those March VIX futures was about 35.75. Today it's about 33.85. Down less than 2 points. Compare that to the June 950 puts, which you say are down about 1 point of IV. Since those puts are now further OTM than they were yesterday, you would expect that their IV would fall less than if you were comparing an ATM yesterday with an ATM today. So it really works out perfectly.
 
dmo, you are just a bucket of knowledge :) thanks for the info, removed some more mystery for me. I will continue to follow the numbers.
 
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