Wednesday, March 14, 2012

Behold! Fear Squared! CBOE Launches VIX of VIX Index! (VVIX)

I liked the "fear squared" bit. It's actually a derivative of a derivative of a derivative. On which you'll probably be able to buy derivatives.
From MarketBeat:
In the wise words of the nation’s longest-serving president, Franklin D. Roosevelt, “The only thing we have to fear is fear itself.” Today, the Chicago Board Options Exchange has begun tracking just that–the fear of fear. CBOE announced the beginning of its new “VIX of VIX” index (VVIX). The index will track the volatility of CBOE’s Volatility index–the market’s so-called fear gauge.

“Volatility traders are intrigued with the ability to formulate new strategies based on the relationship between the VIX Index and the volatility of the VIX Index,” said William J. Brodsky, CBOE chairman and chief executive. “The fact that our customers were looking for a way to measure the volatility of the VIX shows just how far the VIX Index has come.”...MORE
Here's the CBOE white paper (I kid you not):



CBOE is expanding its suite of volatility benchmarks with a new index called the VVIX Index, the VVIX for short. The VVIX is a volatility of volatility measure in that it represents the expected volatility of the 30-day forward price of the CBOE Volatility Index (the VIX®). It is this expected volatility that drives the price of VIX® nearby options.

The VVIX is calculated from the price of a portfolio of liquid at- and out-of-the-money VIX® options. The calculation method is the same as for the VIX® and summarized in Appendix 1. CBOE also calculates a term structure of the VVIX associated with different VIX option expirations. The VVIX is disseminated in real time and its term structure is posted on CBOE's web site at

The VVIX is designed to guide and inform the growing number of investors in VIX-based products. The VVIX and its term structure convey:
  • The expected volatility that determines VIX® option prices.
  • The expected volatility of the VIX® itself to a nearby horizon.
  • The mean and standard distribution of settlement values of VIX® futures and options.
Different points on the VVIX term structure price portfolios of VIX® options (VVIX portfolio) to different expirations. A position in a VVIX portfolio replicates the volatility of VIX® forward prices. VVIX portfolio prices have usually been at a premium relative to future realized volatility. The discount is a volatility risk premium. For nearby expirations, these prices have also tended to surge at the same time as VIX®. These features suggest several trading opportunities:
  • Buying a VVIX portfolio returns the difference between realized and expected volatility less the volatility risk premium. Conversely selling a VVIX portfolio returns the difference between expected and realized volatility plus the volatility risk.
  • To the extent that volatility expectations are unbiased, consistently selling a VVIX portfolio captures the volatility risk premium.
  • Buying a short-dated VVIX portfolio can cushion losses from extreme increases in VIX® futures prices.

1. Historical Behavior of VVIX June 2006 - February 2012

Chart 1a. The VIX® and VVIX, Time Series
VVIX chart