One Number Tells You When It Gets Ugly.

What's going on everybody? Welcome back to Tasty Live. I'm Jamal Chandler. He is Mike Butler. We have some tasty research and here to bring it to us is the former roadie for the peel it back tour of the 9-in nails, Julia Spina. Julia, how are you doing? >> That show was awesome. That was one of the best concerts I've ever been to. I got so many XL t-shirts. Oh boy, that was a deep cut. Excuse the pun. That was awesome. >> Yeah. Yeah, we we know we know you were part of that tour. It's fantastic. It's great. Thank It's nice of you to join us this morning. >> Oh yeah, great to be here. >> I like this new thing where I just don't know what he's going to say and I just wait till [laughter] it happens and and you know, it's been fun. Two for two. >> We're in the same shoes. Yeah. I I never know what I'm going to roll up to. >> What you got this morning? Today I'm talking about how the VIX can be used as a trading signal. Um we got this piece from Sahil if you want to give him a follow over on X, but we're going to be talking about how volatility or volatility can potentially be used as a trading signal. And here we're specifically going to be looking at the VIX to VIX ratio. Um where that has historically landed and what selling premium with this as an indicator um might do to the statistics at least from a historical back. >> It's okay though. >> Oh yeah, >> this is championing this for years. He sees this all the time on the Friday morning show. >> Yeah, it's Yeah. Well, maybe he did steal it from you, but we're gonna be back testing it. I don't know if you've ever >> Oh, did you ever back test it? >> No. >> See, we're coming in with something a little a little different. We're mixing it up. So, we're we're back testing this uh the VIX to VIX ratio. I'm curious to see how you used it um and like what your kind of thresholds were because that was something that I found interesting here. Um we use like relative volatility measures all the time. We use um IVR, IBP to just kind of get a sense of like whether or not volatility is elevated because VIX at 25 could mean something totally different depending on where the VIX was at a week ago. Um so here we're going to be using that ratio to kind of get a sense of like volatility inflation. So I'm curious to see like how the thresholds in this study line up with how you've used it um historically. >> Cool. >> Cool. All right, let's get into it. So um let's get into the first slide. So the VIX which measure which measures the implied volatility of the fear index. The VIX reached some of its highest levels in the past decade after the market crashes in April um and in March of this year. Um and the current VIX is fairly low at 88. Um so we we're coming off like pretty significant highs and you can see a lot of chop quite a few spikes kind of coming into this year as well. Um and now we're kind of at relatively low levels and um today we were going to talk about like kind of what that means in context and specifically as it when it comes to the ratio between these two signals. Um so on the next slide we're going to talk a little bit about what these are if you don't know but VIX is basically an indicator of market sentiment and sort of like fear in the market is how it's kind of anecdotally used and very importantly the VIX is negatively correlated with its underlying index the S&P right um on the contrary the VIX is the implied volatility of the VIX and it's really an indicator to kind of understand the uncertainty or fluctuation in expectations around future volatility and that relationship with its underlying is a bit different and the VIX however is usually positively correlated with this underlying in the VIX. And so here we're going to be looking at the relationship between these two as a ratio of one another. But just to give a little bit of context, that's kind of what these two are. If you want to add anything to that about like maybe some intuition behind these two signals. >> Yeah, I mean VIX is derived off of SPX options, right? At the money, but a lot of the upside or downside. And then VIX is derived off of VIX options. Either upside or downside using at the money as well. I always You guys ever see this movie called Multiplicity? Probably not. It's an old movie. >> Multiplicity. >> Yeah. It was with Michael Keaton. Um he was very busy in life and so he created a clone of himself to be able to do other things and whatever. And then one time the clone got smart and we ended a clone of itself >> and it didn't turn out so well. It was kind of weird. It's kind of weird reading it. >> That's how I always think of ease. >> Clone of >> That's a good way to think about it actually. >> It's a derivative of a derivative, right? Like it's >> it's a derivative of a derivative of a derivative of a derivative. No, but like the more the more you kind of compound these signals, the more you take like, you know, derivatives of derivatives of derivatives, um the more volatile those signals tend to become and you can lose some of that signal in that noise. So, it's kind of you want to be cautious about how many times you're kind of taking a derivative on top of a derivative. And this is also part of why it can be difficult to back test like IVR and IVP because that's another, you know, manipulation of the VIX, right? we're trying to use it to convert it into an active trader signal, but that creates a very volatile signal that can sometimes uh you know you you can sometimes lose information about the broader context um in that volatility. So um and that's a very good point. Um but here these are two >> what exactly right >> if only Michael Keaton knew [laughter] >> only. >> I'm looking at multiplicity right now. Michael Keaton and Andy McDow. >> Yeah, that's the one. >> It looks fun. Well, I got to I got to go ahead and give it a watch. But for now, we're going to be talking about the multiplicity of the VIX. So, if we go to the next slide, we can look at the correlation between these two. Um, the VIX and the VIX rolling three-month correlation. So, importantly, this is an underlying the VIX um is correlated with this underlying historically. And that historic correlation is pretty strong. It's around 084, meaning that they tend to move in the same direction most of the time. makes sense because um rapid rise in the VIX typ typically correlates right with like panic in the market which would then get reflected in the VIX as well. So just a little bit of a note about that relationship and then um if we go to the next slide here we're going to talk about the VIX to VIX or the yeah VIX to VIX ratio and how that has historically been distributed over time and what you can see is over the past 10 years it's really remained between five and seven that ratio about 60% of the time with a median value of six. It's currently around 5.41, so very close to its kind of median value. In 2024, it only fell below five once um on August 5th, but then dipped below that threshold several times during the April 20, like April 25, March of 26 kind of like market sell-offs. So, it's really that outside those ranges that we're interested in, outside that 5 to7 range that we would find interesting when those, you know, those kind of outlier movements in that ratio is what we're going to be focused on. Right. >> And that's exactly it. I would always I remember looking at a lot and seeing that median closer to it was like 5.6 I thought but 5.4 you out you guys obviously really did numbers on it. It was just me eyeballing it and um I would say it's it's when things are ugly it's can be around three or two um and when you have a 2017 type of year where everything is fine markets ball is low markets are higher it's around nine or 10. >> Yeah. So, um, can get ugly indeed, but it's it's good to know that. I mean, it sounds like your eyeballs did a pretty good job of kind of approximating what that typical range tends to be. And I think like this is like just kind of a nice thing to just keep in mind in the back your in the back of your head because again like IVR and IBP and other relative volatility measures um can get skewed, right? because those are really just looking at like a one-year look back range where you know maybe if the VIX spikes very high during that one-year look back um that can skew sort of like what IVR means at a given level. So this is just kind of another way to get context around volatility using two very well-established signals um with that kind of 5 to seven range being where that ratio typically lands. >> I like it. >> Let's do it. Okay, we go to the next slide. So now um we're going to be testing spy strangles using the vivix to vix ratio as kind of an opening indicator. Um so uh an interesting thing to note here kind of aligned with that distribution um that ratio falls less than five about 25% of the time between five and six in this uh 48% of the time and then greater than six um 27% of the time. So um here we're going to be using those kind of like tight observation bands just to get a good number of occurrences sort of in each one. Here we're looking at short 45d 16 delta strangles managed to 21 days. Um and you can really see how that ratio changes that average performance. We're kind of aligned with what you said Jamal when it's less than five that's when we're seeing higher average P&Ls. Um you know comparable win rates across all three bands. Um but then the largest loss that we recorded in that time actually going down in you know when that ratio tends to be quite low and then that becomes like your win rates are still high. um as the ratio kind of goes up, but that's when that exposure to those tail risk occurrences tends to go up a bit. >> Yeah, makes sense. >> The sear sear largest loss >> largest lo I very much prefer to largest loss because you could just have like one really bad data point. Yeah. Um that I mean like 2020 was a good example of this, right? We had like a really fast whipsaw. So in this situation like some of the early managed positions actually underperformed the positions held to expiration just because of the timing of like that one specific event. So that's kind of why I like to use um because that sort of looks at a larger scope of occurrences as opposed to just one. But I think that this tells an interesting story. And then when we go to the next slide, this is because the ratio typically decreases as VIX increases. In other words, the higher the ratio, the lower the VIX. And this implies that strangles underperform in those lower IV markets during this look back period specifically which is consistent with some of our other findings. Um so since the election the median VIX has been 16.7% with a VI v a VIX to VIX ratio of 6.3. Currently we're near 24 while the ratio is closer to 5.4 aligning with that kind of long-term data. So that's sort of like the underlying mechanics around like why we're seeing this difference in strategy performance um when using this ratio. Um but very interesting nonetheless. Yeah, I think this is uh something we should pay more attention to, especially with the ratios being a pretty strong signal of higher P&L relative to similar win rate. >> Yep. And just another way, another lens to look at the VIX. We like different different ways to look at the VIX and then kind of aligning strategies with sort of like multiple independent lenses, I suppose. And this is just another one of those lenses. um where this one is pretty easy easy to calculate just because it's you know the division right >> yeah I like this chart a lot actually it's really good >> we like a good chart um so great work from Sahil we can go to the takeaways so examining the VIX and VIX together can provide a deeper understanding of volatility and potential market direction unlike most underlying assets and their implied volatilities VIX and VIX are highly correlated and move in the same direction historically and then that VIX tox ratio can also serve as a trading signal for option sellers. A lower VIX to VIX ratio correlates with better performance. And here that threshold that we used was five. Um however, IV or IV rank is a more straightforward and simpler signal for most traders. Both kind of serve the same purpose. Um although that VIX to VIX ratio I will say um might be a little bit less prone to skew from outlier movements just because IV you know P and IV rank um are calculated over a one-year look back window and you know unusual volatility behavior in that window can skew those metrics especially IVR something that we've talked about um but whatever you want to use um they all kind of work. >> Awesome. Fantastic stuff. Thank you. Thanks a hill. >> Yeah, thanks a hill. That's all I got. >> Now you have another movie that you need to watch on your uh on your radar. >> Every time I come on here, >> hackers is >> No, hackers is first. >> I had a dream about hackers last night. This is how this is how bad this is getting. We keep talking about it. It's it's penetrating my dreams. >> Was it like the dream that you had in the movie? >> No. >> Yeah. See, [laughter] won't know about that. >> And if you can find the DVD copy, let me know because I Man, am I going to have to dig to find >> excuses >> with the excuse out? Well, it sounds like this movie is worthy of having on DVD. So, I think it's worth it. >> Yeah, for sure. >> I'm so excited for this movie. [laughter] >> Someday I'm going to watch it someday. >> Appreciate you. >> Thank you, guys. >> Appreciate you. >> Adios. >> Yeah. >> Oh, man. We are um out of time, but uh just u you know, I I'll just recap quickly. We closed a lot of our snow. Um that was a lot of the earnings um here basically. I mean, that's mostly what you did right in the snow. >> I still have the 330 on. Someone in the YouTube chat asking what I'm doing with that. I'm just gonna leave it. Uh if we get any selloff, it will uh appreciate. If not, I'll just let it go. Uh and just close it tomorrow if if anything. But the rest of them I closed and we have a net profit overall. >> And then a couple of butterflies in S&P and NDX. >> Yep. >> There you go. >> Yep. And >> you rolled your Microsoft up. We talked about that. >> Yep. Bought back the 550, rolled it out to November to the 580 for a $2.35 credit. So now I have a 30 point wide diagonal spread if we continue to rally here. >> There you go. And mostly I closed out snow. I did buy a couple of extra to the upside just seeing if this thing is going to continue. And I did do a diagonal in Intel long nove short oct. Um I'm interested in this idea. If all up stock up all comes back in these tech names. We'll see what happens. So yeah >> that's been the morning show. Mike's been great as always. Uh >> I am Jamal Chandler. He is Mike Butler. You can reach out to us on Twitter at any given time. He is at trader Mikey B. I am at Jamal Chandler. And >> [music] >> uh now got confirm with Chris TP the other side later. [music]