It's no secret that volatility is dropping like a rock. The S&P 500 has gone almost 100 trading sessions without a decline of 1% or more, and it hasn't had any move of 1%―either up or down―in more than 50 sessions.
With the waters so calm, it's unsurprising that the CBOE Volatility Index fell below 10 for the first time in almost a decade earlier this month. The VIX, as it's called for short, attempts to measure expected volatility based on the pricing of S&P 500 options. When investors are willing to pay more for options, they expect larger moves in the market (and vice versa). This is called "implied volatility."
Currently, the VIX is trading around 12. It's ticked up a bit as investors buy up options to hedge against a potential market pullback. The VIX is an annualized figure; thus, based on where the volatility index is trading right now, traders expect the S&P 500 to move 12% up or down in the next year.
CBOE Volatility Index
A reading of 12 for the VIX is well below its long-term average of 19.6, but significantly above the actual, observed volatility so far this year. For example, daily volatility during the past month for the SPDR S&P 500 ETF (SPY) was a mere 5.3 (annualized). Historical volatility in any given month rarely gets below that level.
Even on a longer-term basis, volatility is slipping. The rolling one-year volatility for SPY is 10.8. A reading below 10 for this measure is extremely rare (and explains why the VIX scarcely falls below 10).