If You Are Going To Trade VIX Options, You Need To Know These Things

Created by the Chicago Board Options Exchange (CBOE), the Volatility Index, or VIX, is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. Derived from the price inputs of the S&P 500 index options, it provides a measure of market risk and investors’ sentiments.

If you want to trade OPTIONS on the VIX, you need to know this information:

Your brokerage account needs to be a margin account, and you need to sign up for options trading.   There are various levels of option trading available (e.g., the first level allows covered calls).  My experience is that to trade VIX options you will need to be authorized to trade at the second level.  These levels vary from brokerage to brokerage, so you will have to ask what is required to be long VIX options.

While technically not the actual underlying, VIX futures act as if they were the underlying for VIX options—the options prices do not closely track the VIX.  A big VIX spike will be underrepresented, and likewise, a big drop probably will not be closely tracked.  This is a huge deal. It is very frustrating to predict the behavior of the market, and not be able to cash in on it. The only time the VIX options and VIX are guaranteed to sort-of match is on the morning of expiration—and even then they can be different by a couple of percent.  The closer the VIX future and the associated VIX option are to expiration, the closer they will track the VIX.

The VIX options are European exercise. That means you can’t exercise them until the day they expire. There is no effective limit on how low or high the prices can go on the VIX options until the exercise day.

Expiring In-the-Money VIX options give a cash payout.  The payout is determined by the difference between the strike price and the VRO quotation on the expiration day.  For example, the payout would be $1.42 if the strike price of your call option was $15 and the VRO was $16.42.

This is by no means an exhaustive list but should get you started on your way to becoming a VIX Options expert!