The lowest VIX since 1993 sends messages to investors

7 years ago - Published in Commodities, Finance

The CBOE Volatility Index .VIX, better known as the VIX and the most widely followed barometer of expected near-term stock market volatility, was down 0.24 points to 9.19, after earlier falling to 9.04, its lowest since December 1993. The VIX has never ended a session under 9 in its history but is on pace to log a close near that level today. 

The VIX is derived from the price of S&P 500 Index .SPX options. A low VIX reading typically indicates a bullish outlook for stocks.

The volatility index, whose long-term average level is around 20, has been extremely subdued this year as a surging stock market has chilled demand for options that provide protection against price declines, driving down the index itself.

On Monday the index closed below 10 for the eighth straight day, marking its longest such streak ever.

The VIX is based on the price of options contracts on the S&P 500 index 30 days into the future and tends to move in the opposite direction of stocks. And because stocks fall faster than they rise, the gauge is often used as a way to hedge against a precipitous tumble in stocks. Low readings tend to suggest that the vast majority of investors aren’t racing to buy protection, or insurance, against sudden drops in the future, which implies that market fear is low.

Most market analysts have noted the decline in the VIX doesn't necessarily imply market complacency. Rather, the drop in the index reflects its structure, tracking the bets of options traders on whether the S&P 500 index will rise or fall.

Options give traders the right to buy or sell an asset at a preset price, and the steady rise in the S&P 500 has given traders little reason to bet on a significant, volatile drop in the stock index.

The VIX last topped 20 on Nov. 9, the day after the U.S. presidential election. The S&P 500 has climbed 15 percent since the election and closed at a record for the 27th time this year on July 19. The stock index set a fresh all-time high Tuesday morning, with energy and financial shares leading the advance.