Options: Spyders Reflect Lower Volatility

Here's a practical example of what it looks like when people say volatility is declining and signs of increased risk-taking are becoming more apparent. Going into the holiday weekend, the VIX is inching back to the levels we saw before Lehman Brothers declared bankruptcy.

That could show more risk tolerance, or it could simply show that traders tend to make smaller and fewer bids before a long weekend. The markets are clearly not back to the levels of last summer, but the SPY at-the-money straddle is a clear sign of just how much risk premiums have declined since December. It's plausible that the market will return to the higher implied volatility levels of December, or even November. But for now, expected market moves (as measured by the SPY straddle) are at their lowest levels in months.

Jud Pyle is the chief investment strategist for Options News Network (www.ONN.tv) and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.