For most of the past two decades, the S&P 500 and VIX have been inversely correlated: When one goes down, the other goes up. That changed abruptly in 2022. What caused the S&P and VIX to suddenly move in unison?
"I've never seen it before. This is unusual and not something we should expect to see," says Tier 1 Alpha Senior Executive Advisor Mike Green. "This chart highlights the frequency with which weird things happen."
The red vertical line running through 2022 identifies a pivotal point when the CBOE introduced Tuesday and Thursday expirations for 0DTE options.
"Once those options opened up as tradeable instruments, people did tend to move away form the VIX and longer-dated hedges because they can more tactfully enter hedges around certain risk events like CPI or the Fed," explains Tier 1 Alpha co-founder and CEO Craig Peterson. "They don't have to have this big 30-day hedge on exposure."
Green adds: "I do think that's the key story here. When you start talking about the VIX being very low, it's a little bit like saying, 'Well, the price of whale oil is relatively low.' It's increasingly irrelevant to the discussion."
Green believes some elements of this VIX shift are here to stay.
"When I look at these types of charts, I can't help but think that some of the components and characteristics of the markets have been permanently changed by that red line," Green concludes.