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By Chris McKhann

I get nervous when everyone is saying the same thing--and that seems to be the situation with current volatility levels.

The sharp drop in the VIX volatility index over last week has left many saying that volatility is too low. It is very rare that most people agree on such things, but that appears to be the case with the VIX.

The last two weeks have seen the VIX jump above 31 and then very quickly fall back near 17 in the second-biggest/quickest drop in VIX history. The 10-day historical volatility was above 17 percent a week ago but has fallen to 9 percent.

Option pundits and strategists for some big institutions--as well as everyone on the last episode of CNBC's "Options Action" show on Friday--are all saying that volatility is a "buy" here. I have been saying the same thing--and the unanimity is exactly the reason behind my nervousness.

Some argue that fear is still in the markets, but just in different places. I wasn't really sure about that until I saw the CBOE Skew Index, which measures how expensive out-of-the-money puts are compared to out-of-the-money calls.

It is important to realize that the VIX itself has an aspect of skew because of the range of options it includes. The VXO, which is the volatility index used by the S&P 100 just for at-the-money options, is down to 15.8 today. Add to that the fact that the Skew Index jumped to 128.64 on Friday, the highest level since the high of its very short life on Feb. 28.

So some of the fear can be found in the out-of-the-money puts. And there is fear in the further-out puts, as seen in the SPX term structure and the VIX futures.

This means that those seeking protection for the downside in equities are likely best served by buying near-term at-the-money puts and selling out-of-the-money puts--therefore taking advantage of that skew.
Source: Where Is the Fear in This Market?