However, the VIX is just an index that measures SPX option prices, which means it does not have any shares that can be traded. Fortunately, the VIX does have tradable options. In fact, options on the VIX are some of the most actively traded contracts the options market has to offer. In , VIX options traded million contracts, which translates to an average daily volume of over , contracts. Since all of the content on our website talks about options, you may be wondering why we have a separate guide specifically for volatility index options.
In this guide, you'll learn about the most important nuances related to VIX options so that you can avoid making uninformed trading decisions. In this section, we'll cover two of the biggest VIX option nuances:. As you know, an option must be worth at least the amount of its intrinsic value. As we can see, the deep-in-the-money January VIX put is priced almost perfectly to the price of the January volatility future. So, don't be fooled by any potential "mispricings" when examining options on the VIX.
A long synthetic stock position consists of a long call and short put at the same strike price, and in the same expiration. As the name suggests, a synthetic stock position should replicate a position in the underlying shares.
Clearly, the cost of the long synthetic does not match up well with the price of the index, as it would with standard equity options on non-dividend stocks. Note that any subtle differences between the price of the synthetic stock position and the VIX future can be attributed to using the mid-price of the options in the synthetic. Additionally, they're cash-settled, as the VIX doesn't have tradable shares that can be purchased or sold by exercising.
Why does settling to the same number keep VIX options and futures priced to each other? Knowing that VIX options and futures settle to the same number VRO , the product prices must track each other very closely, otherwise there are free profits to be made. In the following table, we'll compare the final settlement value of options on the VIX based on VRO on the day of settlement. As we can see here, the settlement values of VIX options has nothing to do with the VIX opening price on the morning of settlement.
Because of this, it may be wise to close profitable VIX option positions on the Tuesday before VIX settlement, as holding through settlement may lead to unfavorable settlement prices.
When trading VIX options, you might wonder why you don't just trade the longest-term VIX options to allow more time for your positions to profit. The answer is that not all VIX options have the same sensitivity to changes in market implied volatility. When examining movements of the VIX Index and futures, you'll notice that the VIX Index is the most sensitive, while volatility futures with further settlement dates are less sensitive.
As a result, longer-term options on the VIX are less sensitive to changes in market in implied volatility. Consider the following visualization of three different VIX futures contracts in Between September 2nd and October 10th, the following movements occurred in each volatility product:.
Now, let's compare the changes in the call options with strike prices of 20 over the same period:. So, while trading long-term options on the VIX might give you more time to be right, volatility will need to experience much more significant fluctuations for your positions to profit. You've learned the most important concepts related to options on the VIX. Be sure to recap with the summary of main concepts below!
Here are the essential points to remember about trading VIX options: VIX options are used to trade changes in market implied volatility. VIX options are cash-settled, which means the options settle to a cash value on the morning of expiration. Things You Need to Know. Summary of Main Points.More...