The historical parallels are scary because when investors anticipate that volatility will be low, it can be sign of excessive complacency.
.. One of the things measured by the Vix is the balance between supply and demand for options. It’s a proxy (though not a perfect one) for the cost of protecting an S&P 500 portfolio against loss over the next 30 days. When it is very low, it suggests there are lots of people willing to sell insurance policies against a market fall, and few people wanting to buy protection.
.. Easy money encourages investors to pick up pennies of insurance premium in the options market, and to buy the dips in the S&P 500, the equivalent trade in equities.
.. Investors are prepared for some rise in volatility, but from an abnormally low level.
The puzzle then isn’t why the Vix is so low, but why the market has been so calm for the past couple of months. Why hasn’t there been a 1% move up or down in the S&P 500 since December 7? Bears might go back to central banks