A VIX option is a non-equity option that uses the CBOE Volatility Index as its underlying asset.
It originated in 2006 and was the first exchange-traded option. VIX can be bought or sold just like an equity option.
VIX options give individual investors the opportunity to trade on market volatility. There is potential to make a big profit by trading these options, but there is also risk involved. This article will explain how to trade VIX options to prepare investors to manage that risk.
What is the VIX?
The CBOE Volatility Index, or VIX, is an index that shows the stock market’s expected 30-day volatility. The VIX gets its value by estimating how volatile the prices of options on the S&P 500 will be between the current date and the expiration date.
The VIX is known as an investor’s “fear gauge.” The VIX moves up when market prices are falling and there is fear in the market. The VIX moves down when market prices are steadily rising and there is less fear in the market.
When would an investor purchase VIX options?
A trader would purchase a VIX call option if he believed that the VIX is going up. As mentioned earlier, if the VIX is going up, then the market is likely going down. This gives investors the opportunity to make a profit from a failing market.
A trader would purchase a VIX put option if he believed that the VIX is going down. If the VIX is going down, then the market is rising steadily, with little uncertainty or fear.
What are some things to know about VIX options?
VIX options trade in the European style. This means that they can only be exercised on the expiration date. This differs from American style options, which can be exercised anytime from the time of purchase until the expiration date.
VIX options expire on a Wednesday in each month. This differs from standard equity options, which expire on the third Friday of each month.
VIX options can be traded on the Chicago Board Options Exchange (CBOE: VIX).
Trading VIX options gives investors the opportunity to capitalize on the volatility of the market. This is an added tool one can use in their options trading playbook that has the potential for a big return on investment.
If an investor thinks that the market is going to rise, crash, or remain relatively steady, then buying a VIX option is good strategy to use to profit from that market shift.