Regardless of how you state it, VIX is low. Today VIX got as low as 9.04 which is the second lowest intraday low on record. The lowest print for VIX came on December 27, 1993 with a low of 8.89. I could waste a thousand more words describing how low VIX is relative to history, but instead of doing that I’d like to dive a bit into what it means.
VIX is low, but market volatility is low as well. What I mean by that is the realized volatility of the S&P 500 is at historic lows. The two go hand in hand. Although VIX takes into account the current market environment it is a forward-looking measure, but where we are often has an influence on where we think we are going. Right now, the option market believes that we are going to experience low volatility, this has been the case for 2017 and VIX indicates this is going to continue.
So far this year VIX has been right about what the market was going to do. What I mean by that is displayed on the chart below which shows the closing price for VIX each day this year combined with the subsequent 21 day realized volatility for the S&P 500. Option implied volatility is often slightly overpriced relative to the volatility realized by the underlying market. From 1990 through this year the realized volatility for the S&P 500 has been lower than VIX just over 87% of observations. The chart below shows that VIX has been low, but still higher than the subsequent realized volatility every day this year.
As long as VIX remains at low levels, the market expects more of the same. However, we know from history that when VIX turns to the upside it may do so with a vengeance. The big question these days is how much longer can VIX remain low, but the question I have been pondering is how much long will VIX be higher than realized volatility. To get an idea, I took a look at streaks of VIX being overpriced and was surprised to find where we are right now isn’t outside historical norms. The table below shows the current run of VIX greater than realized SPX volatility ranks 9th based on history back to 1990.
Basically, VIX is low, VIX is low for a reason (realized volatility is low), and the current run of overpriced VIX is not outside historical norms.