Options Imply Little Risk of Market Corrections Anytime Soon

A watchful Federal Reserve has created a buoyant environment for equities. The S&P 500 Index is on course for its least volatile year since 1964. On top of that, anticipated volatility as measured by the Chicago Board Options Exchange Volatility Index, or VIX, is near historical lows.

Although the lack of anticipated volatility in the S&P 500 is reflected in the VIX, the distribution of returns predicted by options tell a different story, indicating that equity holders can expect little upside potential by hedging downside risks. Put another way, options -- which provide extremely efficient estimates of the market's assessment of short-term risk -- indicate that the market is not sounding alarms over the likelihood of a severe near-term correction.