By Sarah Rudolph

Last week at the FIA conference in Boca Raton, the Chicago Board Options Exchange announced a new CBOE VIX of VIX Index (VVIX) that measures the volatility of the CBOE Volatility Index (the VIX index). The VIX index itself is a measure of the market’s expectation of future volatility implied by the prices of options on the S&P 500 stock index.

Who are the likely users of the index? Anyone who trades volatility products or watches the VIX index, according to Catherine Shalen, director, research and product development, for CBOE. “It is a natural offshoot of the VIX; it uses the same methodology but applies it to a new asset class.”

Currently, there are no futures or options traded on or planned for the VVIX index, according to Shalen. It can be used as an indicator, in particular to capture volatility risk premium for those who trade a portfolio of VIX options. VVIX measures the price of a portfolio of VIX options, just as the VIX measures the price of a portfolio of S&P 500 options, she said. The CBOE has noticed that, historically, if you sell the portfolio on a consistent basis, you can expect, on average, to earn a volatility risk premium.

Mark Wolfinger, a former CBOE market maker and author of The Rookie’s Guide to Options, said he thinks the new index will be a success for the CBOE because of the volatility of the VIX index, but said he expects the VVIX to be used mostly for speculation rather than hedging, and he prefers to think of options as a hedging tool.

Read the rest of the report here.