• FEAR IS AS MUCH a part of modern trading
as macroeconomics. But don’t let those
fears haunt your trading dreams. Two
lesser-known market measures can help
self-directed traders get a deeper understanding of risk and what makes the market
You can’t trade a gauge or index or “
feeling.” But you can keep an eye on these barometers and grow your awareness of potentially
extreme market moves. Because options
markets are often driven by fear, learning to
spot those clues could elevate your trader
status and possibly improve results.
Institutions routinely use VVIX and
SKEW, mostly for tail-risk hedging strategies.
You can, too. Let’s take a deeper dive.
FEAR AND THE VVIX
The CBOE Volatility Index (VIX)—
commonly referred to as the “fear gauge”—is driven
by SPX options prices. But what about the
VVIX index, which takes the VIX to a deeper
level and analyzes, in some sense, the “fear
of fear?” The CBOE uses the same methods
in both indices, but there’s one crucial difference. The VIX is based on SPX options, while
the VVIX is based on out-of-the-money
(OTM) VIX put options.
Punch in the symbol VVIX on your
thinkorswim® from TD Ameritrade platform. Consider the long-term chart to see
VVIX’s range and the average value of that
range. Where does the VVIX’s value stand
with respect to that average?
In short, the logic of the VVIX is based
on volatility. When vol is high, you might
expect greater implied-vol fluctuations. As
a result, the market could bid up options
on vol products. If you see a relatively high
VVIX, this suggests there may be a premium to sell in VIX options.
BLACK SWANS AND SKEW
Don’t confuse this with the “skew” that
VOL WHISPERER • PRO
IN THE MONEY
VVIX and Skew–I’m Watching You
BIG IDEA: CAN YOU MEASURE FEAR? CERTAIN MARKET
MEASURES HELP TRADERS DETERMINE WHEN
THE MARKET SEEMS “FEARFUL.” LEARN TO DO THIS
FOR YOURSELF TO BETTER EVALUATE RISK.
COOL INFO: Want to know more about VVIX
and SKEW? Check out cboe.com for all sorts of
nuggets of info on these two indicators.