Here Is What The Real Fear Index Is Saying

Tyler Durden's picture

With so many talking heads claiming the 8% drop in stocks and VIX's jump back above 20% as a sure-fire indication that the market is in chaos and needs Fed help stat, we remind readers that VIX reflects a contemporaneous premium for up/down movements in the future offering little insight into downside risk per se and more reflective of a regime shift in market volatility - i.e. a rising VIX means market participants expect the markets to move around more (up and/or down).


While looking at the difference between VIX (forward volatility) and current realized volatility can offer insight into participant's concerns (or the difference between out-of-the-money volatility vs at-the-money volatility - or skew), there is a cleaner (and smoother - less spike and decay-like) way of judging the level of concern in trader's heads.


The implied correlation, a topic we have discussed in the past at length, quantifies the difference between the index's volatility and the summation of the underlying volatility of the names in an index. In a nutshell, the implied correlation measures the relative demand for instant liquid index macro protection relative to its underlying names (a slower less liquid way to protect yourself). The higher the correlation, the greater the risk of a very significant downside move (since correlations tend to approach 1 when systemically bad events occur).



By implicitly measuring the market's demand for this relative protection - and its implicit downside risk sentiment - implied correlation is much more applicable as a measure of investor sentiment.

Currently, implied correlation is rising rapidly - a worrying trend - and has broken back above 70% (a critical threshold from last September when capital market risk became epic). We will be watching implied correlation closely - especially relative to VIX - to get a handle on the market's relative demand for downside protection and thus a real 'fear' index (as opposed to a 'movement' index).


VIX remains useful in a self-fulfilling way since so many market participants watch it but with ETFs impacting the short-dated vol markets more and more, we suspect implied correlation (with its 'relative' measure of risk) may well become more focused upon.

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Iconoclast's picture

Hey, where's our regular fix of where the USA national debt is at man..we need our fix..are we there yet? Is it used?

tawse57's picture

I always get confused by the VIX.

When it is high that means people are fearful, worried and panicky about the markets crashing? Right?

When it is low that means people are calm and relaxed about the markets and believe the markets will rise? Right?

And the contratrarian investor sells stocks when the VIX is low and buys stocks when the VIX is high? Right?

So a rising VIX now is signs of people getting worried about a crash coming? And when it gets really high the crash will - FINALLY - be here and all us contra types can go out and buy stocks on the cheap?

I wish this crash would hurry up and come!


mayhem_korner's picture



VIX is just a volatility index.  It doesn't infer direction, just magnitude of expected future movements.  It's often cited as the "fear index" because people get panicked by volatility.  But there's a difference between avoiding volatility/getting to the sideline and layering in downside protection.

ActionFive's picture

I'm thinking it is a MOPE index. They know you still look at it.

5880's picture

Mayhem, Stop speaking the truth in the forum

it confuses 99% the readers

mayhem_korner's picture



My gold gets shinier when implied correlation rises.  So I agree its a good fear index.  ;)

sabra1's picture

when sabra1 was wee little, momma used to rub vix vapo rub on my hairless chest!

eclectic syncretist's picture

Maybe it should be called the "schizophrenia" index

Mercury's picture

...we remind readers that VIX reflects a contemporaneous premium for up/down movements in the future offering little insight into downside risk per se and more reflective of a regime shift in market volatility - i.e. a rising VIX means market participants expect the markets to move around more (up and/or down).

 Not quite.  An X% down move will typically boost VIX more than an X% up move.

Outside of financial markets, “volatility” implies erratic, unpredictable or sudden action in an unknown direction but up is less “volatile” as measured by option pricing than down (even if neither movement is particularly “volatile” in the above sense). So, maybe “fear index” or “uncertainty gauge” is actually a more accurate description of what is being measured.

Anyone can see that more uncertainty is associated with down than up because markets tend not to make sudden, massive up moves like they can/do to the downside. And most of the sudden, big upside moves that there have been in market history were likely preceded by big, sudden legs down (bounces essentially). At any given time the S&P 500 (for instance) is probably more likely to drop 10% than pop 10% in a single day even though the long term bias is up. This means higher options prices and thus a greater impact on the VIX etc.  Even if you’re net short, a falling market usually begets more market participant uncertainty than a rising market and that gets reflected in premiums.

I would think that the ability to sell rich index options and buy cheap individual equity options would keep implied coorelation more or less in line.

mayhem_korner's picture

An X% down move will typically boost VIX more than an X% up move.


On a nominal scale, yes, because price distributions are skewed to the upside (lognormal). 

5880's picture

have you met my friend Kurt?

Kurt Osis?

He's neat

But seriosly,

Cox, Ross, Rubinstein took care of all of this. It's binomial distribution, not Gaussian

walcott's picture

the entire paper market is one big fucking karcken ponzi!

slewie the pi-rat's picture

keep reading zH, slewie...

maybe you'll understand this someday?

Loucleve's picture

where can I see this implied correlation?  BigCharts?


Be nice to keep an eye on it.

Hannibal's picture free rt online charting

pismo10's picture

VIX is not a great product. It basically goes up when SP goes down and vice versa. If you plot inverse VIX with SP500 they correlate very well.

MeanReversion's picture

Except that it's not a product, it's an index.  Sure, you can trade ETFs that try to mirror the VIX but none ever really do perfectly because they hold VIX futures, which is not the same as the VIX itself, at best it's a proxy.  Not to mention, said products suffer from contango risk and counterparty risk. 

That said, I will dabble in volatility ETFs as short trades.  None of these instruments do you want to hold long term because you will get hammered over the long term.

5880's picture

Pismo meet 1996-2000

1996-2000 meet pismo

pismo, say you're sorry

BlandJoe24's picture

Hi Tyler,

First many, many thanks for all your contributions!  They've been a huge help to me in increasing my understanding of what's happening as well as helping me make good decisions.


You say:  "The higher the correlation, the greater the risk of a very significant downside move (since correlations tend to approach 1 when systemically bad events occur)."  

Therefore, I find the following confusing and am hoping you can explain:

1.  Why is there no rise before August 2011, when a huge downside move occurred?

2.  The chart peaks (approaching 1.0) in December 2012.  What was the "very significant" downside move then? 


How are you suggesting this chart is useful - correlating (on a probability basis) with what phenomena? and historically correlated to what events/phenomena?

Thank you!



5880's picture

Because the guy who writes these option articles kind of gets it,

the correlation is the options of the indidvidual stocks that make up the spx vs the actual spx

firms like IB (timber hill) started vol arbing the 2 long ago because the 500 stocks options have a higher combined vol than their final index. why? because enron can and did go to zero while the spx lived on. indidvidual event risk. HFT trading fits nicely into these correlations as well. So you sell vol in 500 stocks and buy it in the spx to complete the arb. But when the shit hits the fan you yocals start buying panic insurance at any price. signaling the capitulation

bxy's picture

it is the implied vol of the front month ATM straddle on the cash.

FreeMktFisherMN's picture

Is TZA one of the Vixes? Have studied this a lot and some people are posting that they see a flag in the TZA right now perhaps up to 30. Is that reasonable? I anticipate some more bearishness and I don't want to have an indicator that doesn't follow through, kind of like what the old ZH post about the warning of VIX was about. 

eclectic syncretist's picture

the best tip I can give you is don't take tips. 

Milton Waddams's picture

Thank you for clearing up this widely-held misconception.  VIX has absolutely nothing to do with measuring 'fear'.  It strongly correlates with a measurement of the average daily price range.  It measures fear in so much that declining days typically have larger ranges than advancing days.  

Clayton Bigsby's picture

Awesome post - thank you

sudzee's picture

QE already priced into the market. The fear is that it won't come.

KandiRaverHipster's picture

so in a nutshell, people are more worried about losing a little money than making a lot of money.  sounds about right.

BeetleBailey's picture

....and with so many retail investors out of this market, the VIX is mostly manufactured goo done by the bankstas, institutionals (now run out of Belleview, by the way), and hedge(hog) funds.

...ergo......just another indicator.....and not a trusty one to kinda........BLOWS UP...then calms down....THEN GOES BERSERK AGAIN.....

and then goes back to sleep.....

...much like the EUR/CHF today.......WTF was that action?!

Some Euro-trader hit the wrong button.....meirde!

Back to bed....

bxy's picture

The VIX is the implied volatility of the "at the money" front month straddle of the S&P 500 cash.  I don't know what the hell these jokers are talking about.

kevinearick's picture

Obamics: Money is War

Bad assumption. War is war. Money incrementally displaces the center of the field before quantum commencement.

The basic algorithm of History repeats because empires are built and destroyed as an example, to future generations. Civil marriage is for the majority, which wants to be told what needs to be done, so they can tell others what to do after the meeting, which, along with ready access to a ponzi slave population, themselves in the future, requires something other than garbage as the input, and a corrective feedback mechanism to handle 20 layers of garbage multiplier effects in the obfuscation. Both mechanisms are the same, the looking glass, which balances the resulting gravity on the edge until use.

Obama is a downstream derivative, playing war games with money like his predecessors. As legacy assets and their resolute owners become obsolete with recognition, they must accelerate ROE transfer and so employ agency to wage war on new family formation at the margin, to delay replacement. Agency is all about delay proliferation through misdirection, hiding nonperforming assets by growing their demand among dependent middle class ponzi consumers, creating a human relativity circuit that a child can see through, which is the point of drugs, like Ritalin, and propaganda, like Harvard, K-12, and early childhood education.

Like everything else in the universe, it’s SOP. It’s God’s world, whether anyone likes it or not, but if you think ahead, you can adjust the gravity of stupidity, because critters “think” their reality into existence with false empire choice. God gives Cain and Abel each a hammer. Abel builds a house. Cain uses his to kill Abel and take the house. Cain is smarter because Abel thought Cain was stupid, and they were both stupid. In the next iteration, they both get lawyers, and start building a prison. Law enforcement is drama on the way to the cliff.

A man needs to make a living, and a woman needs to have children, on a durable platform, hence durable goods orders, which everyone needs regardless of persuasion, and together they have all of nature on their side. Empire is the counterbalance. When agency interferes with the balance, there are several layers of profit on its false assumptions, all subject to reversion now that the replication ponzi is collapsing. Irrational tyranny increases with denial, resulting in accelerated denial of service, in a relatively closed, positive feedback loop.

FIRE grows pot in “its” forest, all expenses paid by the taxpayer, and puts the non-conformers in jail. Same operation in Afghanistan, but with a stiffer sentence. Tobacco served as money for many good reasons, including connectivity to the land, less violence, less hoarding, and it accounted for its own psychological addiction tax. Implicit is best, but anything along the learning curve is better than digital script. The key point in local conversion is that rebooting existing script must be accompanied by a change in behavior that reopens the NPV window, from the bottom up, external dependence price discovery.

War is war, whether through starvation, disease, or bombs. End it swiftly, knowing that robots generate war specifically to get you to give them the technology necessary for the next iteration, as they get farther from nature and closer to the churn pool. You are going to determine the winner, and it doesn’t matter which one you choose because they are all a-holes, as you can plainly see. What does matter is that you roll out the product in a manner that provides for your children and their children. It’s a time fulcrum, SOP.

Cave dwellers only understand fear. They repeat the past in fear of the past, looking in a rear-view mirror programmed by the empire. Children learn by example, one way or the other, mostly by replication. You cannot force others to raise their spirit from dead DNA. That’s something they have to do for themselves.

Humans are born to make mistakes; that’s what they do. Robots refuse to admit their mistakes for the benefit of others and move forward. The object is to make original mistakes. The goal is to be human, which you were endowed with at birth. Wealth is about demographics, which is about DNA, which is about breeding.

The robots breed war, recording it as profit. And they have short-circuited themselves again, with digital computers, their latest hammer looking for a nail, resulting in the same outcome, ruination of the currency. Pick up the pieces and make a life with your own mortar.

Stupidity, manufactured crises of, by, and for manufactured majorities, is no reason for an emergency response on your part. All robots make the same offer, non-recurring capital gains for recurring income losses with inflation, playing relativity in opposite directions to record a paper profit, embedding the loss in currency.

Go where you must to keep your eye on the ball and elevate your spirit. Leave the robots to masturbate on empire TV for their own amusement. Tyrants robe themselves in ponzi patriotism (Tyler TM), always with bait and switch wordplay to hide common law, feudalism, in plain sight.

FIRE burns down its own forest accordingly and blames it on Act of God, which it defines. Same sh-show, good-cop-bad-cop, different day. Put the flames out when it suits you, to claw back your income. Police your own first, and others last, to adjust the freedom and security feedback loop.