This article was originally published in The Option Strategist Newsletter Volume 18, No. 22 on November 26, 2009.
No matter how you measure it, volatility is decreasing. There are several reasons for this – and we’ll discuss them in this article. In addition to traders’ perceptions about forthcoming actual volatility, there are some strategy-related influences, as well as seasonal influences, that are contributing to this most recent decline in volatility.
Let’s begin by noting that the CBOE’s Volatility Index ($VIX) is at or near its yearly lows and hasn’t been significantly lower since September, 2008, prior to the Lehman bankruptcy. The “old” $VIX – trading under the symbol $VXO since 2003 – has already closed at new yearly lows this week. $VIX is just slightly below 21, but $VXO is already approaching 19. While it is true that these volatility measures are based solely on the S&P 500 Index ($SPX) options that trade on the CBOE, they are and always have been a good measure of the overall mood and volatility of stocks in general.