The S&P Volatility Index (VIX) is a measure of volatility priced into S&P Index options.
The VIX typically spikes when the market sells off to reflect increased demand and cost of put options used to protect investors against a broader market decline. In contrast, when the market rallies and investors are sanguine about the future, demand for these options–and the price traders must pay to buy them–tends to decline, keeping the VIX relatively low and range bound.
Since periods of heightened fear tend to coincide with major market lows, there’s an adage: When the VIX is high, it’s time to buy. And, over time, spikes in the VIX have proved good buy signals for long-term investors.
This year has been remarkable for its unprecedented lack of volatility. Over the past 6,957 trading days (data going back to January 1990), the VIX has closed below 10 on only 27 occasions and a whopping 18 of those trading days have been in 2017. It’s fair to say that never in the history of the VIX have investors witnessed so little fear and volatility priced into the S&P Index options market.
There are several possible explanations for the extraordinary depressed reading on the VIX this year.