What's the VVIX, and Why Does It Matter?

Markets are demanding, and every tool that can demystify them helps. The good news for option traders? Smart folks keep inventing new ways to craft a trading strategy. Many traders have traditionally relied on tracking the S&P 500^® (SPX). Then along came "the fear gauge," or the Cboe Volatility Index^® (VIX), which gives a theoretical estimate of the SPX's future volatility based on SPX options. To help option traders take an even deeper analytic dive, the Cboe^® introduced the VVIX in 2012, which in simple lingo is called "the VIX of the VIX."

Just as the VIX is calculated from SPX options, the VVIX is calculated from VIX options. The formula is basically the same for both. It's a complex weighting of out-of-the-money options to create a metric for the market's estimation of what the volatility of either index might be in 30 days.

The value of the VVIX can indicate when the VIX isn't very volatile and isn't foreseeing much volatility in the SPX. This can happen when the VIX is relatively low—under or around 15, for example. Alternatively, a high VVIX suggests the VIX might be more volatile in the future, which in turn can indicate a market belief that the SPX might also be more volatile.

Since the beginning of 2020, the VVIX has ranged from 93.7 in January 2020 to a low of 77.1 in November 2022, peaking at 157 at the beginning of the COVID-19 pandemic in March 2020. There are a couple things to note. First, spikes in the VVIX occurred around the times there were spikes in the VIX. And when the VIX is relatively low and not moving much, it's the same for the VVIX. Second, just as the VIX is more volatile than the SPX it's based on, the VVIX can be more volatile than the VIX it's based on. So, potential opportunities suggested by a high VVIX, for instance, might be fleeting if the VVIX drops back down.

You can't trade the VVIX directly because it's an index with no shares, options, or futures contracts to buy or sell. But just as the VIX can be used, in part, to consider strategies in SPX options, the VVIX can help inform strategy decisions in VIX options. A low VVIX indicates that VIX options may be relatively inexpensive. If the low VVIX is accompanied by a relatively low VIX, and you expect market volatility to increase, a long call option or long vertical call spread on VIX might be bullish strategies to consider. 

If the VVIX is high, VIX premiums can also be relatively high. If you're bullish on the VIX in that scenario, a short put or short put vertical spread on VIX might be bullish strategies to consider because of the higher credits possible with the higher volatility in VIX options. Whether you choose debit or credit strategies can depend on a number of factors in addition to relative premiums. In addition to being bullish or bearish, your forecasts for pricing variables—such as how time and volatility will affect the options—should also be considered. 

You might try adding the VVIX to your market research. If you put it next to the VIX and SPX, you can see how the three of them move relative to each other in live trading. And now that you understand what the VVIX is, it might become a valuable part of your trade-identification toolbox.