Today's VIX close of 12.9 certainly sounds low but to put it in perspective let's take a look at the actual historical (realized) volatility of the S&P 500 over various time frames.
Historical Volatility (current)
Past two weeks (HV10): 6.85
Past Month (HV21): 6.20
Past 6 weeks (HV30): 11.55
Past 3 Months (HV63): 12.52
Past 6 Months (HV126): 11.49
Past Year (HV252): 12.84
Now let's take a look at the HV at a point in time 1 year ago:
Historical Volatility (as of 2/1/2012)
Past two weeks (HV10): 7.61
Past Month (HV21): 8.65
Past 6 weeks (HV30): 12.99
Past 3 Months (HV63): 21.22
Past 6 Months (HV126): 29.89
Past Year (HV252): 23.26
As you can see, the last year of trading has experienced much less volatility than the previous year. Note that the spot VIX on 2/1/2012 was 18.55, which fell in the range between HV30 and HV63 at the time. If you look at today's HV range you'll see that a VIX of 12.9 is priced at a reasonable point given the past year's levels of volatility.
Below is a graphical view of this progression of HV over the past year:
Historical Volatility (as of 1/24/2007)
Past two weeks (HV10): 6.68
Past Month (HV21): 6.82
Past 6 weeks (HV30): 6.34
Past 3 Months (HV63): 7.26
Past 6 Months (HV126): 7.35
Past Year (HV252): 9.69
So can VIX go lower? Absolutely - with another 30% to fall before reaching the 6-year low!
This is why it is critical to not assume that volatility will rise just because it is low relative to the recent past. When trading volatility ETPs such as XIV, VXX, ZIV, and UVXY you always need to consider the shape of the VIX futures term structure and their values relative to VIX as well as historical volatility in order to make trading decisions.
