• MARKETS ARE DEMANDING AND EVERY
tool helps. The good news for options traders? Smart folks keep inventing them. Traders have traditionally relied on the SPX.
Then along came “the fear gauge,” or the
Cboe Volatility Index (VIX), which gives a
theoretical estimate of SPX’s future volatil-
ity, based on SPX options. To help options
traders take an even deeper analytic dive, in
2012 the Cboe introduced VVIX, which in
simple lingo is “the VIX of the VIX.”
Just as VIX is calculated from SPX options,
VVIX is calculated from VIX options. The
formula is basically the same. It’s a complex
weighting of the out-of-the-money (OTM)
options to create a metric for the market’s es-
timation of what the index’s volatility might
be (SPX, in the case of VIX, and VIX, in the
case of VVIX) in the following 30 days.
VVIX, then, can indicate when VIX isn’t
very volatile, and so isn’t foreseeing much
volatility in SPX. This can happen when
VIX is relatively low—under
or around 15, for example.
Alternatively, a high VVIX
suggests VIX might be more
volatile in the future, which
in turn can indicate a market
belief that SPX might also be
Over the past year, VVIX
The first is that spikes in VVIX occurred
around the times there were spikes in VIX.
And when the VIX is relatively low and not
moving much, it’s the same for VVIX. The
second is that just as VIX is more volatile
than the SPX it’s based on, VVIX can be
more volatile than the VIX it’s based on.
IN THE MONEY
What’s the VVIX and Why
Does It Matter? ;
BIG IDEA: YOU MAY NOT HAVE THOUGHT A LOT ABOUT
THE VOLATILITY OF VOLATILITY. TURNS OUT, IT COULD
BE A HELPFUL TOOL TO ADD TO YOUR TOOLBOX.