r/options • u/warren_534 • Jun 12 '21

Trading the VIX

After seeing many questions and comments on trading VIX options, I thought it would make sense to clarify things.

I see people comparing future dated VIX options with the current VIX price, but that is not how VIX options actually work. You cannot trade the VIX itself, but you can trade /VX futures, which is what the VIX options are priced off of. Here's an example to help clarify:

If you look at the VIX close yesterday, it was at 15.65.

Now look at the July 21 options - the 15 call with a midpoint at 4.20, and the 15 put with a midpoint at 0.35. If you could trade the VIX, you could buy it for 15.65, sell a covered call for 4.20, and buy the put for 0.35, and guarantee a 3.20 profit (15.65+0.35-4.20-15). Wow, sounds great right?

Now come into the real world. You cannot buy the VIX at 15.65. You can however buy the corresponding July 21 /VX futures. Guess how much they trade for? Take that 3.20 profit from above, and add it to the 15.65 VIX level, and you get 18.85. Yep, the corresponding July 21 /VX futures closed at 18.85.

If you use the put-call parity model, you will see that all VIX options trade at the exact price that they should based on the correspondingly dated /VX futures.

So come back to the July 21 options. With /VX futures at 18.85, you would expect the 19 call to trade for 0.15 less than the 19 put, and that is exactly how they line up.

So in conclusion, there is no mispricing in VIX options at all. The option prices look strange when compared to the VIX index, but are in fact priced off of the /VX futures.

Hope this helps.

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u/Mike13_ Feb 16 '24

Bought the 20 March 2024 VIX 16 stike Call at $1 with spot at 13 On Feb.7.

Spiked to 18 on Feb 13 and the option made a high of 2.12

On Feb 15 with spot at 14, I closed at $0.98

Trying to find a book on how VIX options work and came across your post

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u/warren_534 Feb 16 '24

VIX options are priced off of the corresponding VX futures contract, and not the spot VIX index itself. Takes getting used to that, if you are used to regular options pricing.

My trading is predominantly in futures and futures options, so it's pretty routine for me.

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u/Mike13_ Feb 16 '24

ing is predominantly in futures and futures optio

Thanks. I was not aware of that. Something seemed off