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Nov 2, 2017

tasty Update: Vol of Vol

By:Sage Anderson

Last month, we featured VVIX on the blog to provide a more comprehensive perspective on "the volatility of volatility."

As a follow-up, we are checking in today on current VVIX levels to ascertain whether any important developments have occurred.

As we already know, the VIX is calculated using the implied volatility of options in the S&P 500. If implied volatility rises in S&P 500 options, so too does the VIX, and vice versa.

The VVIX is calculated using the implied volatility of out-of-the-money (OTM) options in the VIX itself. The VVIX is therefore said to measure the "volatility of volatility” (aka "vol of vol”).

Per a recent episode of Market Measures, we can see that the VVIX has risen in recent weeks. Because the VIX has stayed fairly stagnant, that means that the ratio of VVIX over VIX has also risen (numerator increasing, denominator constant or decreasing).

The chart below illustrates how the VVIX over VIX ratio is currently trading near its all-time highs:

While it's important to note the VVIX/VIX ratio is trading near all-time highs, it’s likewise important to see that the lowest levels observed in the ratio occurred during the heart of the 2008-2009 Financial Crisis.

From these data points, we can infer that lower levels in the VVIX over VIX ratio are indicative of extreme volatility, while higher levels in the VVIX/VIX ratio reflect a greater degree of market complacency - as is currently the case. 

The question then is how a short premium approach performs when the VVIX/VIX ratio is at or near highs? And while we’re at it, let’s also measure how that same strategy performs when the VVIX over VIX ratio is low, or moderate.   

In order to answer that question, the Market Measures team ran a study that measured the performance of short strangles in SPY (using data from 2007 to present) which segmented the VVIX/VIX data into four groups. 

The goal was to isolate the data such that strangle performance could be evaluated when the VVIX/VIX ratio was very low (1st quartile), low (2nd quartile), average or above (3rd quartile), and high (4th quartile.). 

To help you further conceptualize the VVIX/VIX ratio, consider that the historical range is roughly 1.30 to 10.07. Currently, the VVIX/VIX ratio is trading approximately 9.1 - as noted earlier, only a stone’s throw from its all-time high. 

Now let’s dig into the results, which are compiled in the graphic below:

Importantly, the data in the chart above shows us that the short SPY strangle produced its best results when the VVIX/VIX ratio was at its highest levels. Along those lines, that same trading approach worked nearly as well when the ratio was in the third quartile (average or above levels).

While there’s certainly no guarantee that history will repeat itself, the above research indicates that increased VVIX levels in low VIX environments produced attractive results during the period studied.

Due to the importance of this topic, we hope you’ll take the time to review the complete episode of Market Measures focusing on the VVIX over VIX ratio when your schedule allows.

If you have any questions about the “volatility of volatility,” we encourage you to reach out by leaving a message in the space below, or contacting us directly at

We look forward to hearing from you!

Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

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