Volatility is one of the most important concepts on the financial markets. It measures the expected range of price fluctuations and thus provides information about the nervousness or calmness of market participants. Options traders in particular monitor the VIX volatility index very closely, as it is regarded as a barometer of fear and uncertainty on the stock market. But it goes one step further: the so-called VVIX measures the fluctuation of the VIX - i.e. the "volatility of volatility".
What may seem like a theoretical gimmick at first glance has enormous significance in practice. The VVIX can help to identify turning points in the markets at an early stage and act accordingly. In this article, we look at what is behind the VVIX, how it is interpreted and which strategies are suitable for high VVIX values.
What is the VVIX?
The VVIX is a volatility index that indicates the expected fluctuation intensity of the VIX measures. The VIX, in turn, is based on the implied volatility of options on the S&P 500 Index. While the VIX therefore measures how strongly the market presumably moves, the VVIX shows how strongly the the expectations of this movement itself could change.
Specifically, if the VVIX rises, this means that market participants are expecting strong fluctuations in volatility - a double uncertainty. This occurs particularly frequently in phases in which rapid and sharp price movements are expected on the stock market.
The Chicago Board Options Exchange (CBOE), which calculates both the VIX and the VVIX, uses option prices on the VIX itself to determine the VVIX. The stronger the demand for these VIX options, the higher the VVIX.
Podcast tip: VVIX - The fear barometer of the markets
What does a high VVIX mean?
A high VVIX value signals that market participants are expecting sharp fluctuations in volatility - and this is often a harbinger of dramatic market movements or the end of a downward trend. This was particularly noticeable during the COVID-19 pandemic: On March 16, 2020, the VVIX reached its highest level to date at 209 points - an extreme expression of the market panic at the time.
In normal market phases, the VVIX usually moves between 75 and 95 points. Values above 120 already indicate above-average unrest, while values above 150 or even 200 represent rare extreme states. At these times, many shares are already close to their local lows. The market is then not only pricing in risks, but also the possibility of massive counter-movements - important information for traders.
Why are particularly high values relevant?
Particularly strong swings in the VVIX are usually associated with intense market movements - often also with sudden recoveries after sharp corrections. This makes the VVIX a helpful tool for identifying possible turning points in the market. It is striking that while highs in the VVIX are considered strong signals, lows are less meaningful.
A sharp rise in the VVIX - following an abrupt price slump in the S&P 500, for example - indicates a high level of hedging activity with VIX options. If many market participants seek protection at the same time, this reflects a tense market situation that could soon unravel.
Strategies for high VVIX
Although the VVIX cannot be traded directly, its information value can be used profitably in several strategies. Here are some tried and tested approaches:
1. short puts on individual shares
A high VVIX often goes hand in hand with a sharp fall in share prices. If you are planning to buy a particular share anyway, you can use a so-called Cash Secured Put sell. This involves committing to buy the share at a predetermined price - and receiving an attractive premium in return because the volatility is high. If the price rises, the option expires and the premium remains as a profit. If the price continues to fall, you receive the share at the agreed price - often still cheaper than the average of the last few weeks.
2. short puts on the S&P 500
To avoid the risk of individual companies, the broad market can also be traded via SPX options or ETFs such as SPY. Selling puts on the overall market when the VVIX is high offers a favorable risk/reward ratio, especially when a low is looming.
3. short calls on the VIX
When the VVIX is very high, the VIX is usually also high. A fall is likely - especially if the market tends to calm down. The Sale of call options on the VIX is one way of betting on this normalization. Important: This strategy should always be hedged with a long call in order to limit the risk.
4. long calls on the S&P 500
Another approach is to speculate on a market recovery through the Purchase of call options. Rising prices create a leverage effect that can lead to large profits. The disadvantage: In phases of high volatility, the premiums for calls are also expensive. A precise assessment of the timing is crucial here.
5. buying shares directly or topping up savings plans
For long-term investors, high VVIX values often offer favorable entry opportunities. Those who are already planning to invest in quality shares often find better valuations in such market phases. Regular savings plans also benefit: Falling prices lead to higher unit numbers and lower the average purchase price.
Risks and limits of the VVIX
As helpful as the VVIX is, it is no guarantee of an immediate market turnaround. Even with extremely high values, there is a possibility that uncertainty will persist. Moreover, historical patterns cannot simply be projected into the future: Just because the VVIX marked the market low at 200 points in the past does not mean that this will always be the case again.
Careful risk management therefore remains essential. Anyone trading options should consciously work with position sizes, deltas, hedges or spreads. The VVIX is a tool - but not one that replaces decisions.
Conclusion: VVIX as a valuable companion in options trading
The VVIX is one of the most exciting but often overlooked indicators in a trader's toolbox. If you read it correctly, you can gain valuable insights into potential turning points, especially in uncertain or extremely volatile market phases. Although it is not directly tradable, its informative value can be used strategically - be it through the targeted sale of options, the purchase of shares or the adjustment of existing positions.
As with any indicator, the same applies here: The greatest value comes from the interaction with other market observations and a healthy dose of experience. If you combine the two, you can effectively integrate the VVIX into your market analysis as an early warning system - and act more wisely, cautiously and, in the best case, profitably.
