What’s Behind The VIX’s Big Fall?

April 8th, 2010

The steady decline in the CBOE Volatility Index (VIX) over the course of the market’s rally from the March 2009 bottom has been by more than 58%. But this pales in comparison to the decline in the implied volatility (IV) of many options on industry-specific exchange-traded funds (ETFs) and individual equities.

Why has the pricing of equity options taken a bigger hit over this period than that for index options as represented by the VIX? Really I think that the concern about a sudden market crash or Armageddon type event is really out of the market. Since index options in general, and S&P 500 Index (SPX) options in particular, are predominant among those used to hedge portfolios against such dire eventualities, these options and hence the VIX, which is a measure of their volatility are always “juiced” due to excess demand for crash protection. Still, we generally have the opinion that the VIX will stay low for a couple years.

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