Chicago Board Options Exchange (CBOE) VIX of VIX (VVIX): Explained | TIOmarkets
BY TIO Staff
|June 27, 2024The Chicago Board Options Exchange (CBOE) VIX of VIX (VVIX) is a crucial tool in the world of trading. It is a measure of the volatility of the Chicago Board Options Exchange (CBOE) Volatility Index (VIX), which is often referred to as the 'fear gauge' of the market. The VVIX, therefore, is a measure of the volatility of this 'fear gauge', providing traders with a deeper insight into market sentiment and potential future volatility.
The CBOE VIX of VIX (VVIX) is a complex concept, but it is an essential tool for traders who want to understand and anticipate market volatility. This glossary entry will delve into the intricacies of the VVIX, explaining its purpose, how it is calculated, and how traders can use it to inform their trading strategies.
Understanding the CBOE VIX of VIX (VVIX)
The VVIX is a measure of the expected volatility of the 30-day forward price of the VIX. This means it provides an estimate of how much the VIX is expected to fluctuate over the next 30 days. The VVIX is often referred to as the 'volatility of volatility' because it measures the volatility of the VIX itself.
Understanding the VVIX requires a basic understanding of the VIX. The VIX is a real-time market index that represents the market's expectation of 30-day forward-looking volatility. It is derived from the price inputs of the S&P 500 index options, and it provides a measure of market risk and investors' sentiments.
Calculation of the VVIX
The VVIX is calculated using the same methodology as the VIX, but it uses VIX options instead of S&P 500 index options. The calculation involves a wide range of VIX option prices and uses a model-free approach, which means it does not assume any particular statistical process for the underlying VIX returns.
The calculation of the VVIX involves a complex mathematical process, but the key point for traders to understand is that a higher VVIX value indicates a higher expected volatility of the VIX, and therefore a higher expected volatility in the market.
Interpreting the VVIX
The VVIX is a measure of market sentiment, similar to the VIX. A high VVIX value indicates that traders expect significant changes in the VIX, which suggests that there may be significant market volatility ahead. Conversely, a low VVIX value suggests that traders expect the VIX to remain relatively stable, indicating a calm market.
It's important to note that the VVIX, like the VIX, is not a predictor of market direction. A high VVIX value does not necessarily mean the market will go down. It simply means that large market moves are expected, which could be either up or down.
Using the VVIX in Trading
The VVIX can be a valuable tool for traders, particularly those who trade options. By providing a measure of the expected volatility of the VIX, the VVIX can help traders anticipate potential market swings and adjust their strategies accordingly.
For example, a trader who sees a high VVIX value might decide to buy options, as high volatility can lead to larger price swings and potentially higher profits. Conversely, a trader who sees a low VVIX value might decide to sell options, as low volatility can lead to smaller price swings and potentially lower profits.
Limitations of the VVIX
While the VVIX can be a useful tool for traders, it's important to understand its limitations. The VVIX is a measure of expected volatility, not actual volatility. This means it can sometimes be misleading, as the market does not always behave as expected.
Furthermore, the VVIX is a relatively new index, and its predictive power is still being studied. Some research suggests that the VVIX can be a useful predictor of future volatility, but other research suggests that its predictive power is limited.
Strategies for Using the VVIX
Despite its limitations, there are several strategies that traders can use to take advantage of the information provided by the VVIX. One common strategy is to use the VVIX in conjunction with other indicators to get a more complete picture of market sentiment.
For example, a trader might look at the VVIX in conjunction with the VIX and the S&P 500 index. If the VVIX and VIX are both high, this could indicate a volatile market. If the S&P 500 is also trending downward, this could indicate a bearish market sentiment.
Conclusion
The CBOE VIX of VIX (VVIX) is a complex but valuable tool for traders. By providing a measure of the expected volatility of the VIX, the VVIX can help traders anticipate potential market swings and adjust their strategies accordingly. However, like all trading tools, the VVIX should be used in conjunction with other indicators and should not be relied upon as the sole predictor of market behavior.
Understanding the VVIX and how to use it in trading can be a challenging task, but it is a worthwhile endeavor for any trader who wants to gain a deeper understanding of market volatility and how to navigate it. With careful study and thoughtful application, the VVIX can be a powerful tool in a trader's arsenal.
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