Strong earnings boosted U.S. stocks on Tuesday, driving the S&P 500 to a record high while also sending a popular options-based gauge of expected price volatility down to a more than 23-year low.
The CBOE volatility index, better known as the VIX and the most widely followed barometer of expected near-term stock market volatility, fell to 9.04 intraday on Tuesday, its lowest since December, 1993, before rebounding to close at 9.43.
The VIX is derived from the price of S&P 500 index options. A low VIX reading typically indicates a bullish outlook for stocks.
The volatility index, whose long-term average level is around 20, has been extremely subdued this year as a surging stock market has chilled demand for options that provide protection against price declines, driving down the index itself.
The index has now closed below 10 for the ninth straight day, its longest such streak ever.
Market experts peg the relative tranquility to factors including a generally upbeat macroeconomic backdrop and the lack of any big events that could stoke volatility.
And the sense of calm is not restricted to the equity markets. Merrill Lynch's gauge of one-month U.S. Treasury market volatility was at 46.9963, a record low.
To be sure, some traders in the options market have taken advantage of subdued levels of volatility to load up on contracts that profit from a pick-up in stock gyrations.
"Over the past few days, we've seen a tremendous amount of options activity in VIX," Pravit Chintawongvanich, head of derivatives strategy at Macro Risk Advisors in New York, said in a research note. "These trades all have a common theme – investors expect volatility to move higher after the summer."
On Friday, more than a million VIX options contracts traded in one go. The trader makes money as long as the VIX is between 12 and 35 at the October expiry.