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Almost every business day for several weeks, financial media and other sources have published stories about how investors are "complacent" about market risks. Most stories cite low nominal CBOE Volatility Index(VIX) levels, which we've argued here several times before are not meaningful by themselves.

Right now, the spread between one-month implied and realized volatility in options on North American equity indexes is extremely average, indicating a market that is neither complacent nor fearful. If option implied volatility looks low, that's because equity index realized volatility is also low. You can't blame options traders for pricing contracts in line with what stocks have been doing.

Incessant warnings of complacency, especially when unattached to a specific, confirmable risk scenario, introduce their own sort of risk: the risk of losing money from paying the ongoing costs of ill-timed bearish postures. After the financial crisis, everybody wants to sound smart about this or that looming tail risk, about how unsophisticated investors ignoring the dangers are going to be blindsided by some unknown force. But another risk is that by constantly hedging against some great "unknown unknown", you may mount losses in the form of carry costs and time decay that surpass what you would have lost from even a passive indexing approach.

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