Reuters - The stock market may be sitting near 18-month highs, and volatility has declined sharply, but that doesn't mean investors aren't worried about a downturn in the market.
Volatility has declined to a 22-month low, making it cheap for investors to bet on or hedge against a big drop in the market by buying S&P index put options as a hedge.
The Chicago Board Options Exchange Volatility Index .VIX, Wall Street's favorite yardstick of investor sentiment, fell to a low of 16.21 on Tuesday, near levels not seen since May 2008, just prior to the steepest part of market sell-off.
The benchmark S&P 500 index closed Tuesday at an 18-month high, up more than 70 percent up from 12-year lows a year ago.
The rapid decline in volatility is due in part to low "realized" volatility, or historical volatility over the past 30 days, as the market has been relatively calm. Because of this, the premium to buy put options that are far out of the money is very cheap, and that has spurred investors, even in credit markets, to buy these puts.
"Over the last few days, there has been a noticeable uptick in S&P puts bought that were way out of the money,"
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