A Lack of Fear in the Volatility Index

Just as it seems that everyone is afraid of falling off the “fiscal cliff,” the VIX doesn’t appear to be backing that assumption.

The CBOE Volatility Index dipped below 16 yesterday for the first time in about a month. It hasn’t been above 20, the index’s long-term average since a quick peak above that in late July, and it hasn’t been above 30 in about a year. Many are wondering why the VIX isn’t higher and why it isn’t reacting to the continued drop in the S&P 500 and the fear of the fiscal cliff.

First of all, there are times when a VIX of 16 or 17 is considered high and times when it is viewed as low. Back in early October when the VIX broke above 16, it was quite high when compared to actual volatility, which was below 10 percent. And almost all of that real volatility had come from big moves up in the market, not down.

So that 16 reading reflected expectations of increased volatility. The VIX futures at that time were also carrying sizable premiums, further showing expectations of increased volatility.

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