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Why is it that when the s&p 500 index as tracked by the SPX goes up, the corresponding volatility index as tracked by VIX goes down.
I understand that volatility is directly affecting the price of an option. But I cannot understand why the price of the asset itself has an inverse relation with the volatility?
It is usually the case that when the S&P 500 index (SPX) goes up, the VIX goes down, and when the SPX goes down, the VIX goes up. This is because the VIX is a measure of fear the market. When the market goes up, there is usually less fear, and when the market goes down, there is usually more fear.
But the SPX and VIX do not always have an inverse relationship. On some days, both the SPX and VIX will move in the same direction. I have seen SPX go up on days when the VIX went up as well. Sometimes this occurs the day before a big event that will impact the markets (such as a U.S. government shutdown deadline or a monthly jobs report), and investors become nervous and are willing to pay more for options (which causes the VIX to increase). I have also seen the VIX go down on days when the SPX went down as well. Sometimes this occurs when bad economic news is released, but investors don't think the news is as bad as expected, so option premiums plummet (which causes the VIX to decrease).
The answers has its roots in how the market behaves. Bulls market tend to have very low volatility, and bear markets high volatility. MArket tends to go up slowly, and go down very fast.
As VIX is an index for implied volatility (or expected volatility), in bull markets (markets moving up) it tends to move down, and in bear markets (markets moving down) it tends to move up.
