Daily Options Report

Saw a couple interesting looks at ratios involving the VIX recently, one I agree with and one, well, no as much. Let's start with the latter.

Ashraf Laidi takes a look at the SPX/VIX ratio, and has this.

Exactly fifty two weeks after the S&P500 hit its 12-year lows at 666, the index rose 68%, driving down the VIX near January's 19-month lows. Much analysis has been done on equity indices and the VIX on the S&P index options. But the relationship between the two merits closer attention. Neither the S&P500, nor the Dow have yet retested their January highs. But the technical dynamics of the SP500/VIX ratio can be used as a possible forward-looking signal for a looming decline in the S&P500 index. On Friday, March 5th (52^nd Friday of the 666 low in the S&P500), the S&P500/VIX ratio hit a 5-week high at 65.38. This level suggests these key developments:

Well, don't want to steal his charts, so you'll have to click thru to see his conclusions. But long story short, the ratio is at resistence.

Does it make sense to even look at this ratio though? Here's what he says.

Such ratio analysis may not be the most popular approach to discerning market dynamics, but their viability can be just as relevant as price charts or macroeconomic technicals. We have shown on this site how ratio analysis of related markets could offer valuable forward-looking signals; Gold/Oil ratio ; Equities/ Gold ratio and gold/silver ratioo

Now we'll take as fact the SPX/VIX ratio is up against some resistence. My big question though is does this ratio have any value to begin with. And the answer in my opinion is no.

First and foremost, you're taking a ratio of 2 entirely different types of animals, a stock index and a statistical calculation. Yes that statistical calculation has a correlation to the stock index (about -.66 correlation) but it's still governed more by math than support and resistence. It has a non-zero lower bound. It has a theoretically limitless upper bound. And as such, this ratio can really do anything.

Let's say SPX hits 1100 and the VIX is 22, then it drifts, then hits 1100 again, but this time VIX is 18. Obviously, the ratio has picked up. Perhaps it's now hit some sort of moving average line. But all it's saying is the the market is less nervous this go around than last go around. The market *should* be less nervous than the less go around as it has now digested the gains and presumably re-tested some sort of support, made a higher low, or whatever.

Charting this ratio necessarily means you have to view the VIX in absolutes. To me it's best viewed with a more subjective eye. In other words in the above example, 22 VIX the first go around may have been very fair for that particular market backdrop, and likewise 18 was in line with the latter backdrop. Yet on just pure ratio,you'd notice the number shooting higher, when in reality it had no effective meaning.

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