By Jud Pyle, CFA, chief investment strategist for the Options News Network

What a difference two months can make. A look at the current front-month, at-the-money straddle on the

S&P Depositary Receipts

(SPY) - Get Report

vs. a similar straddle two expiration periods ago shows just how much fear has come out of the equity markets in the last two months.

Currently, SPY is trading for around $87. The February straddle that is at the money now, naturally, is the $87 strike, and it is trading for about $2.45 for the call and $2.45 for the put.

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Remember, a straddle is the term used when both the call and the put (in the same month) are bought or sold at the same time. So in this case, the straddle is trading for $4.90. The break-even prices, for someone who sold the straddle, are $82.10 and $91.90. So the options market is suggesting that is the likely range of possible prices for the SPY at February expiration on Friday, Feb. 20.

Look back at the December SPY options over two months ago, and we can see just how much more volatility was priced into the market. At the close on Tuesday, Dec. 9, SPY was trading at $89.41. The December 89 straddle closed at $7 that night. Note that we use data from the Tuesday instead of the Monday because that was the time when the trading days until expiration were equal. (Feb has one fewer trading day because of the Presidents Day holiday next Monday.)

So two months ago, the SPY at-the-money straddle had a price of 7.8% of strike ($7/$89). Today, the straddle has a price of 5.6% of strike. This decline is one way of showing how risk premiums have contracted in the past two months. Today, the implied volatility of that straddle is 37%. Back in December, that 89 straddle had an implied volatility of 52%.

The decline in the implied volatility is a sign of increased risk-taking in the markets in the same way that the rally in corporate bonds is a sign of increased risk-taking. 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 in the last two months. This is not to say that we will not return to the higher implied volatility levels of December, or even November. But for now, the options market is forecasting milder moves than were forecast at this same time in December.

Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."