Last week, the Chicago Board Options Exchange announced that it has begun tracking what it calls the “VIX of VIX” index (CBOE:VVIX). The index will track the volatility of the CBOE’s Volatility Index (CBOE:VIX), which is more commonly known as the stock market’s fear gauge.
Similar to the VIX, which tracks the market’s expectation for future price swings in the S&P 500 Index by tracking option prices, the new VVIX will track the market’s expectation for the 30-day forward price of the VIX based on options prices.
Now, with all of this attention being given to the fear factor, you’d think traders were a pack of quivering cowards afraid of their own shadows. Well, if you thought that, you’d be dead wrong.
So far this year, the VIX has plunged about 35%, indicating that fear has not been a factor on Wall Street in 2012. In fact, the VIX now is trading at its lowest point in nearly five years, which begs the question—why all the fuss over fear?
The answer, according to the CBOE chairman and chief executive William J. Brodsky, is that, “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.” In a statement announcing the new VIX of VIX, Brodsky added, “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.”
I think this VIX of VIX also shows just how much concern is given to emotion when it comes to trading equities, and options on those equities. If the fear factor is über low — the way it’s been of late — then you can bet the bulls are stampeding. Conversely, if the fear meter begins to rise, it could signal the awakening of the bear from its 2012 hibernation.
Could the VVIX be the next indicator capable of prognosticating a change in the market’s disposition? Perhaps, but up until now just a reading of just the VIX has done a pretty solid job of predicting changing trends.
I suppose that if the VVIX begins measuring a surge in the VIX, then we’ll have a new confirming indicator that fear has begun to flare up in the markets. As for me, I am going to just take a look at the price of stocks, and maybe a look at the VIX itself, to see whether fear is ramping up.
Of course, if I really want to get a sense of the fear out there in the markets, all I have to do is look into the faces of my fellow traders. In my experience, that fear indicator never lies.
At the time of publication, Jim Woods held no positions in any of the stocks mentioned in this article.