Most binary options platforms allow you to trade commodities, indices, currencies and stocks. When we think about trading binary options we have to take a look at the VIX or volatility index (also referred to as the Fear Index or Gauge index) of the Chicago Board Options Exchange (NASDAQ:CBOE). The VIX is a popular measure of the implied volatility of the Standard & Poor 500 Index. The S&P 500 has of 5.8 USD Trillion Dollars in benchmarked capital, and comprises of the leading 500 companies in the US economy.

Since we are all aware of the global implications a country like Spain may have on international markets, I was interested in knowing how did S&P's downgrade of Spain's sovereign credit affect US the equity markets volatility levels, with particular emphasis on the VIX.

After doing some research here are the conclusions: The downgrade had **no significant effect.** In fact, quite the opposite is true. The VIX fell from the close before the downgrade to the opening the day after.

Taking the 250 trading days from 2 May 2011 to 26 April 2012 the VIX had an expected (standard deviation) daily logarithmic return (close-close) of 0.0062% (805 bps). The VIX closed on Thursday at 16.24 and opened Friday at 15.83, representing a -2.6% move (it closed at 16.32 [1]). Assuming these returns are normally distributed **one would expect a move of at least this magnitude 50% of the time**.

Against a generalized hyperbolic distribution (asymmetric) of lambda -2.31, alpha 0.80, mu -0.04, sigma 0.07, and gamma 0.04 **we would expect a move of at least -2.6% 61% of the time** (derived via Monte Carlo methods).

To put a final nail in the coffin, note that volatility is mean reverting and that we are significantly *below* the 52-week and marginally below long-run average. Thus, if nothing of any consequence happened on a given day we would actually expect market noise to push the VIX up (life tip: don't trade volatility).

Since the VIX tracks the expected volatility of the S&P 500 we can conclude that the Spanish downgrade probably had a negligible effect on US blue chips.

To give a better idea of the two density functions:

[1] If we use Thursday close to Friday close this was a +0.5% move which we would expect at least 48% (Gaussian) or 42% (asymmetric generalized hyperbolic) of the time

UPDATE: uses VIX instead of VXX (VIX futures). Figured the expectation of future variance, itself a partial derivative derived through a theoretical model from an index of derivatives on an index of stocks, gets far enough without taking a future of that expectation.