VIX Could Stay Low For Years

The VIX, often referred to as the "fear index," has been a topic of discussion among investors and analysts, with many wondering why it has remained low despite prevailing uncertainty [1]. According to one expert, the VIX could stay low for years due to the mechanics of how dealers hedge option exposures and the rise of yield-enhancing structured products [1]. This is supported by data showing that the VIX has averaged exactly 20.0 since 1990, but rarely trades near this level [1].

Key takeaways

• The VIX has averaged 20.0 since 1990, but rarely trades near this level [1].
• The rise of yield-enhancing structured products may dampen volatility due to the mechanics of how dealers hedge option exposures [2].
• The VIX term structure shows that option players are willing to pay more for future months, indicating a bet on higher volatility [1].

Understanding the VIX

The VIX is a measure of how much traders are willing to pay for various S&P 500 options over the next 30 days [1]. It is often misunderstood, with many believing that a low VIX is bearish due to complacency [1]. However, this is not necessarily true, as the VIX is simply a measure of market volatility [1]. In fact, the VIX has been low for several years, with some periods of high volatility, but overall, it has remained below its long-term average [1].

Factors Contributing to Low VIX

One factor contributing to the low VIX is the rise of yield-enhancing structured products [2]. These products provide a yield enhancement by offering higher returns to investors thanks to the sale of options [2]. When dealers sell such structured products, they effectively buy an option from their clients and hedge the option exposure by trading in the underlying asset [2]. This can dampen volatility due to the mechanics of how dealers hedge option exposures [2]. Another factor is the change in investor behavior, with many investors seeking to hedge against future volatility [1].

Why it matters

The low VIX has significant implications for investors and the market as a whole [1]. If the VIX remains low, it may indicate a period of low volatility, which can be beneficial for investors [1]. However, it is essential to understand the factors contributing to the low VIX and not to assume that it will always remain low [1]. As one expert notes, if people start to agree that volatility will remain low for years, it could be a sign that the opposite will happen [1]. Therefore, investors must remain vigilant and adapt to changing market conditions [1].