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The sharp decline in market volatility has directed a lot of attention to low readings in the CBOE Volatility Index (VIX). Given all of the plausible scenarios for market turmoil not that far in the future, traders have been wondering: Isn't VIX at least a tad underpriced? Nicholas Colas from ConvergEx responds:
"In practice, the VIX measures expected changes in stock prices over the next 30 days. That's it. It is heavily informed by recent actual volatility, as I noted. A VIX reading of 14 shouldn't make anyone, anywhere, feel more confident about what will come down the road in October or beyond. It is simply the relative assurance that the weather will be clear tomorrow."
So, just because VIX is low, it doesn't mean that the market is ignoring or is complacent about risks whose timing is more than 30 days out.If you want to make the case for complacency, though, longer-dated options tell an interesting story. The attached chart shows 3-month S&P 500 VIX-style implied volatility, which is published under the ticker VXV. I've also plotted the long-term mean of this index, which is 27.55.