I think he means you can buy a volatility index on the market for CDSs for MBSs, it's a derivative of a derivative essentially.
In this case you would want to be long such a product when people become suddenly concerned about default risk of MBS but you yourself don't want to be long CDSs on those MBS.
A good reason for this could be you are worried that similar to 2008 going long CDSs could leave you subject to intolerable counter-party risk while the vendor offering the derivative could perhaps be more solvent in the case your VIX contracts pay out. Or it simply offers you more leverage, "jacked to the tits" in The Big Short parlence.
Very speculative regardless but that is just how higher order derivative products in finance are.
The way he described it, he's talking about CDS. "a mortgage, packed into a portfolio (MBS), that has a derivative (CDS), and that derivative’s volatility (VIX for CDS) is tradeable."
CDS is (usually) a derivative on MBS - it's a promise to pay out if a given MBS security defaults.
In this case you would want to be long such a product when people become suddenly concerned about default risk of MBS but you yourself don't want to be long CDSs on those MBS.
A good reason for this could be you are worried that similar to 2008 going long CDSs could leave you subject to intolerable counter-party risk while the vendor offering the derivative could perhaps be more solvent in the case your VIX contracts pay out. Or it simply offers you more leverage, "jacked to the tits" in The Big Short parlence.
Very speculative regardless but that is just how higher order derivative products in finance are.