The Most Underrated Volatility Indices

Quant Galore
6 min readSep 8, 2023

In the volatility game, the VIX isn’t the only player.

Cboe Indices Dashboard

When you hear the word “volatility index”, the first thing that comes to mind is the VIX. This isn’t without reason, as it has proven to be an invaluable tool:

Predicting The Market Might Be Easier Than I Thought

However, the VIX is just one of many extraordinarily useful, but slept on indices used to profitably track and model volatility. So today, we’ll be taking a look at some of the most powerful ones that you are likely to be unfamiliar with.

But before diving in, let’s do a quick refresher on how volatility indices work and what exactly they aim to do.

Vol Indices 101

The main goal of a volatility index is to give information about how much an asset will move up or down by some time in the future. The calculation generally uses options data from a pre-specified range of expiration dates.

This figure generally represents an annualized expected movement that can be converted into your desired time period.

To see what that means, let’s take the VIX for example. On September 8th at ~1:18 PM (CST), the VIX stood at 13.91:

The 13.91 value implies that over the next trading year, the underlying S&P 500, will go up or down by 13.91%. From this, we can get the implied volatility for 1 day by dividing this by the square root of how many trading days are in a trading year:

1DayImpliedMove = 13.91/sqrt(252) = 0.8762%

From this, we can get a 30 day implied move:

30DayImpliedMove = 0.8762 *sqrt(30) = 4.79%

So, from this 13.91 annualized figure, we were able to further extrapolate that the market estimates the S&P 500 to move up or down by ~5% over the next 30 days. This is generally the start of choosing the optimal strikes in a volatility selling strategy: Volatility Trading is Back, Seriously.

The calculation for that initial figure is a bit complex, so we’ll start simple. The VIX uses a strip of SPX options that expire in 23–30 days:

A weighted average of this strip is taken to calculate an index value. The actual methodology is a bit different, but this is the big picture idea. Let’s see what happens if investors get a bit antsy and start paying more for out of the money options:

As the price of out of the money options increased, implying that investors were paying more in expectation of higher volatility, so did the index value.

Now that we know how these beasts work, let’s take a look at some cool ones:

VolSquared: VVIX

The VIX is great at predicting future S&P 500 volatility, but what if we took it a step further and got a prediction of the VIX? Doing so would give us a way to predict how volatile the volatility of S&P 500 will be: VIX-Ception.

Luckily, the VVIX (Volatility of Volatility) Index does exactly that:

Much like the original VIX, the VVIX uses a strip of options to calculate an annualized volatility figure that represents how much the VIX will go up or down by. Except instead of using SPX options, it uses VIX options.

On September 8th, the VVIX stood at 88.05:

After converting using the above calculation, this implies that in the next 30 days, the VIX will move up or down 38%! With the VIX at 13.91 this implies a range of ~ 8 to 19.

Where Are We? The GAMMA Index

For investors looking to enter the market, or for traders preparing to sell options, the main question that comes up is: “How volatile is the current regime? — Are we in a period of high or low volatility?”. Thankfully, the GAMMA realized volatility index does exactly that.

The GAMMA index aims to track the value of a delta-hedged option portfolio. Being delta hedged means that you hold multiple option contracts where the net delta of the position is 0. For example, if an ATM call has a delta of 50 and a put of the same strike has a delta of -50, buying both, a straddle, will result in a net delta near 0. If the stock price moves up or down by $1, your PnL stays flat.

Because a delta hedged position is not exposed to the delta greek, its main exposure is gamma and vega, with vega being the most significant. Vega is essentially the greek for implied volatility and is the greek that volatility arbitrageurs try to profit from. If the vega of the position rises, then the price of the straddle increases. If it falls the price of the straddle decreases.

So this index essentially acts as a rolling implied volatility since the performance of the straddle it tracks is based on the changes in vega.

So when the index is low and trending downwards, it means that delta-hedged straddles have been losing money and thus, it is a regime of low volatility. When it’s high and trending, it means that traders are paying more for vega and that currently times are volatile.

The Big Picture: Macro Vol

The S&P 500 represents just one part of the global economic outlook, but there are other key factors like gold, commodities, and currencies. So while it’s useful to know how volatile the S&P 500 might be, it will be uber useful to also have a heads up on how volatile the other key drivers will be:

While not a single index, these 3 indices are the best way of tracking volatility at a big-picture, macro level:

  • EVZ — EuroCurrency Volatility Index: Tracks the 30-Day implied volatility of the Euro/USD exchange rate
  • GVZ — Gold ETF Volatility Index: Tracks the 30-Day implied volatility of the price of Gold
  • OVX — Crude Oil ETF Volatility Index: Tracks the 30-Day implied volatility of the price of Crude Oil

By monitoring each of these, you can get a birds-eye view of how volatile markets might be, stretching from Europe to the Americas.

If the VIX is rising rapidly, but the macro vols aren’t, a trader might deem S&P 500 implied volatility to be overpriced and may use it as a justification to capture some of that premium by selling options. Conversely, if the outlook on macro volatility seems to be increasing, but the S&P 500’s volatility seems to be flat, a trader can make the decision to bet big with the assumption that American traders are just slow to the party.

All in, these are some pretty slept-on bad boys, huh?

If this article piqued your interest, you’d definitely enjoy some of my other posts just like this one:

Happy trading! 😄

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Quant Galore

Finance, Math, and Code. Why settle for less? @ The Quant's Playbook on Substack