Sequential selloff leaves SPX down 18%: Should the VIX be higher?

• The VIX is high, even in the context of an 18% spot decline

While more common over short periods, extended periods of 30+% SPX realized volatility are historically uncommon, even in most recessions. Volatility typically rises quickly when markets sell off, but compared with previous periods when the SPX is at an all-time low and high-teens percent below its high, both the VIX and realized volatility look elevated.

Furthermore, 10-day close-to-close realized volatility of 37% seems consistent with a VIX in the 30's, but that metric is currently much higher than realized volatility measured at other times of a day. If prices are collected at noon NY time instead of the close, SPX 10-day realized volatility would be below 20.

Even though the VIX's reaction to recent spot downside has been mild, its high starting point leaves volatility high overall, the strategy of Goldman Sachs with a short volatility bias, including put selling and 1x2 call spread overlays.

• Rare sequential sell-off has left hedging with options challenging

The SPX hit a 3-month low in May for the 5th calendar month in a row, the first time it has done that since 1974. May is also on track to be the 7th consecutive month SPX realized volatility has increased - only the second such streak in the index's 90-year history.

Following the previous streak, volatility trended upward for several more years. These data points are not just trivia: the sequential sell-off they demonstrate presents a challenge to investors, play books that are driven by the sharp sell-offs of the GFC (Global Financial Crisis)and COVID eras that see markets bottom quickly and rebound strongly.

Despite one of the larger sell-offs on record, the PPUT hedged equity strategy is down almost as much as the S&P this year, while the rolling 25-delta put strategy Goldman Sachs has been tracking has fallen more than the 80/20 portfolio it is supposed to protect.

• Low skew points toward further volatility underperformance ahead

SPX index skew has fallen sharply during the last month - more aggressively than other global indices' skew has, and in sharp contrast to rising single stock skew. Lower skew implies that market participants do not see implied volatility rising quickly should the sell-off continue, and also likely results from investors buying calls as a right-tail hedge for under allocated portfolios.