What Is VIX Option?

A VIX option is a non-equity index option that uses the Cboe Volatility Index as its 澳洲幸运5官方开奖结果体彩网:underlying asset.

Understanding VIX Options

Call and put VIX options are both available. The call options hedge portfolios against a sudden market decline, and put options hedge against a rapid reversal of short positions on the S&am🍃p;P 500 index. These options thus allow traders and investors to speculate on future moves in volatility.

The VIX option, which originated in 2006, was the first 澳洲幸运5官方开奖结果体彩网:exchange-traded option that gave individual investors the ability to trade on market volatility. The trading of VIX options can be a useful tool for investors. By purchasing a VIX 澳洲幸运5官方开奖结果体彩网:call option a trader can profit fꩲrom a rapid increase in volatility.

Sharp increases in volatility coincide with a short-term price shock in stocks. A volatility increase often, but not always, coincides with a downward trending market. As such, this kind of call option is a 澳洲幸运5官方开奖结果体彩网:natural hedge and can be used very strategically over longer periods, and tactically in the short term. In many cases, it can be a 澳洲幸运5官方开奖结果体彩网:more efficient hedge than equity index options.

The VIX is susceptible to a pattern of slow decline and rapid 💦increase. As such VIX call options, when well-timed can be a very effective hedge; however, VIX put options are more difficult to use effectively. The put options can be profitable for traders who correctly anticipate that a market is about to turn around from a downward trend to an upward trend.

VIX options settle in cash and trade in the 澳洲幸运5官方开奖结果体彩网:European style. European style limits the exercise of the option until its expiration. The trader may always sell an existing long position or purchase an equivalent option to close a 澳洲幸运5官方开奖结果体彩网:short position before expiration. 

For advanced options traders, it is possible to incorporate many different advanced strategies, such as 澳洲幸运5官方开奖结果体彩网:bull call spreads, 澳洲幸运5官方开奖结果体彩网:butterfly spreads, and many more, by using VIX options. However, 澳洲幸运5官方开奖结果体彩网:calendar spreads can be problemati🔜c since different expiration series do not track each other as closely as their equity options counterparts.

VIX Explained

The Volatility Index of the 澳洲幸运5官方开奖结果体彩网:Cboe Global Markets (Cboe) trades with the symbol VIX. However, the VIX is not like other traded instruments. Rather than representing the price of a commodity, interest rate, or exchange rate, the VIX shows the market's expectation of 30-day volatility in the stock market.

It is a calculated index based on the price of options on the 澳洲幸运5官方开奖结果体彩网:S&P 500. The estimation of volatility for these S&P options, between the current date and the option's expiration date, forms the VIX. The Cboe combines the price of multiple options and derives an aggregate value of volatility, which the index tracks.

Introduced in 1993, the Volatility Index (VIX) was initially a weighted measure of the 澳洲幸运5官方开奖结果体彩网:implied volatility (IV) of eight S&P 100 澳洲幸运5官方开奖结果体彩网:at-the-money put and call options. Ten years later, in 2004, it expanded to use options based on a broader index, the S&P 500. This expansion allows for a more accurate view of investorꦛs' expectations on future market volatility. VIX values higher than 30 are usually associated with a significant amount of volatility as a result of investor fear or uncertainty. Values below 15 ordinarily correspond to less stressful, or even complacent, times in the markets.

Because of its tendency to move significantly higher during periods of market fear and uncertainty, another name for the VIX is the "fear index."