The VIX is a measure of the market’s near-term expectation of volatility as realized by a basket of 30-day options in the S&P 500 Index. This basket represents the range of movement expected in the S&P 500 at an annualized rate, predicted at a 68% confidence level. The value given by the VIX is on a percentage basis, so a value of 10 signifies an expected movement up/down of 10% in the S&P 500 (with 68% confidence) realized on an annual basis, then this number is divided by 12 to give a monthly figure. In essence, near term movement of call and put options gauge current market sentiment. Typically, a decline in markets causes stock prices to be more volatile, and premiums tend to rise. This rise is typically due to now worried investors paying higher premiums to cover their positions with put options. The inverse is true should the market outlook be positive.
One of the main reasons that the VIX has remain suppressed is because stock correlations have been at all time lows, especially towards the end of 2017. For this reason, large movements in individual stocks in the SPX has led to very little movement in the VIX. “Marginal winners offset the losers” in a low correlation environment such as this. The decline has been universal, and markets across the globe have been moving to lower and lower correlated levels, resulting in a sustained low volatility setting. Beyond this, the general health of the economy and international growth has led to consistent and steady expansion in markets, maintaining suppressed VIX figures.