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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