What Is the VIX Option?

A VIX option is a non-equity index option where the underlying asset is the CBOe Volatility Index.

Recognizing VIX Options

There are choices for both calls and puts on the VIX. Call options protect portfolios against an abrupt drop in the market, while put options protect them from a sharp reversal of short bets on the S&P 500 index. Thus, traders and investors may make predictions about future fluctuations in volatility using these choices.

The first exchange-traded option that allowed individual investors to bet on market volatility was the VIX option, which debuted in 2006. For investors, trading VIX options may be a helpful instrument. A trader may benefit from a spike in volatility by buying a VIX call option.

Prolonged periods of high volatility are correlated with brief stock market price shocks. Volatility occasionally, but not always, rises when a market is declining. Because of this, this kind of call option is a natural hedge that can be employed tactically in the near term and highly strategically over more extended periods. It often has the potential to be a more effective hedge than stock index options.

The VIX is prone to oscillations between fast gain and sluggish decrease periods. As a result, VIX call options may be a mighty hedge when used appropriately; VIX put options, on the other hand, are more challenging to deploy. For traders who accurately predict that a market is poised to reverse from a downward trend to an upward trend, put options may be lucrative.

VIX options trade in a European manner and settle in cash. The European type restricts the option of exercising abilities until they expire. To pay a short position before it expires, the trader may always sell a long position that is already open or buy an identical option.

Using VIX options, expert options traders may implement a wide range of complex techniques, including butterfly and bull call spreads, among many others. Nevertheless, calendar spreads might present issues since various expiry series may not follow one another as closely as their stock options counterparts.

VIX Described

The trading symbol for the Cboe Global Markets (Cboe) Volatility Index is VIX. But the VIX is not like other instruments that are traded. The VIX represents the market’s 30-day stock market volatility estimate, not the commodity price, interest rate, or currency rate.

It is an index that is computed using the S&P 500 option price. The VIX is derived from the estimated volatility of these S&P options between the present date and the option’s expiration date. The index follows the total volatility value that the CBO calculates by averaging the prices of many options.

When introduced in 1993, the Volatility Index (VIX) was a weighted indicator of the implied volatility (IV) of eight calls and put options on the S&P 100 that were at the money. It was extended to include options based on the S&P 500, a more extensive index, ten years later, in 2004.1. This extension makes a more realistic picture of investors’ predictions for future market volatility possible. Investor trepidation or uncertainty frequently causes higher VIX readings than 30 to indicate high levels of volatility. Values under 15 usually indicate less volatile, or even complacent, periods in the markets.

The VIX is often called the “fear index” due to its propensity to rise noticeably higher during market anxiety and uncertainty.

Conclusion

• The S&P 500 Volatility Index serves as the underpinning for VIX Options trading.
• Call options on the VIX are a natural hedge against price surprises that go lower.
• VIX put options may provide challenges since the S&P 500 index consistently climbs slower.
• Options with a European aesthetic are traded for VIX.