Chicago Board Options Exchange (CBOE) VIX of VIX (VVIX)

VIX of VIX (VVIX) is a measure of the volatility of the Chicago Board Options Exchange (CBOE) Volatility Index (VIX). The CBOE VIX measures the short-term volatility of S&P 500 indexes, and VVIX measures the volatility of the price of the VIX.

(For the latest insight into investor sentiment, check out The Investopedia Anxiety Index.)

The VIX Index was started in 1993. In 2004, VIX futures began trading and in 2004, VIX options began trading. The CBOE VIX measures the short-term (30-day) market volatility of the option prices of the S&P 500 Index (SPX), taken from a range of both call and put options. VIX levels above 30 tend to indicate high volatility; those below 20 tend to indicate low volatility.

The VIX generally indicates the level of investor confidence or fear in the market, and therefore the level of investment risk, but it is commonly known as the "uncertainty index." Higher premiums on VIX options indicate higher levels of uncertainty.

Since January 2013, Vix of Vix reached its highest peak on Aug. 27, 2015, when the Dow Jones Industrial Average rose 319 points following a period of volatility stemming from worries about Greece's long-term monetary shortfall. At one point in the preceding week, the Dow opened trading 1,000 points lower than the day before, but the index regained most of those losses within the hour.

Trading on VIX options allows investors to invest in market volatility regardless of the actual direction of stock prices, and it provides an opportunity to diversify a portfolio. VIX of VIX, in turn, allows investors to put their money on the volatility of stocks rather than just on the stocks themselves. VIX of VIX influences the direction of VIX options: VIX prices are determined based on the Vix of Vix. Vix of Vix is calculated using the same algorithms that determine VIX option prices.

Investors can benefit from using the VIX of VIX because it provides useful insight into VIX option and future prices, including the following information:

• The expected volatility of the VIX
• The expected volatilities that influence the direction of VIX option prices with varying expiration dates
• A general idea of market confidence in the VIX future values

Investors can capitalize on volatility when there are discrepancies between VIX futures prices and their fair values. Pitfalls to investing in the VIX itself include higher commissions and a different tax treatment. It can also be riskier to invest in the VIX because options and futures have set expiration dates—the investor has to predict both the volatility and the timeframe in which it will reach that level.

The most common and basic way to add VIX to a portfolio is through exchange traded notes (ETNs), while options and futures are riskier but have larger payoffs. Options have built-in leverage, which means returns are higher, but their prices can change from the VIX since they are based on expected forward value. They are traded European-style, which means they cannot be exercised before the expiration date. Futures also have inherent leverage, and their prices are based on the forward value of VIX, though the actual value may differ.