Vix Call Option Trading

Vix call option trading

Forex scalping youtube live

If you want to trade options on fear I’ve listed some things below that you should know. If you are interested in other volatility investments besides options see “10 Top Questions About Volatility“.

Cryptocurrency day trading fibinacci pullback strategy

Regarding VIX options:

  1. 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. If you are just getting into options trading this is as high as you want to go anyway.

    Step 1: Get Familiar with the VIX Index

    Selling naked calls for example, is not something for a rookie to try.

  2. No special permissions are required from your broker for VIX options. In general, the same sort of restrictions (e.g., selling naked calls) that apply to your equity option trading will apply here.
  3. Calendar spreads aren’t allowed (at least within my account, with my level of trading). The software didn’t prevent my entering the order, but the order was canceled once I entered it and I got a call from the broker—ok, what did I do now?

    The reason for this restriction is because VIX options with different expirations don’t track each other well. More on that later.

  4. The option greeks for VIX options (e.g.

    Thirteen Things You Should Know About Trading VIX options

    Implied Volatility, Delta, Gamma) shown by most brokers are wrong (LIVEVOL and Schwab are notable exceptions). Most options chains that brokers provide assume the VIX index is the underlying security for the options, in reality, the appropriate volatility future contract should be used as the underlying.

    Trading with the VIX - Trading Options Course

    (e.g., for May options the May VIX futures are the underlying). To compute reasonably accurate greeks yourself go to this post.

  5. 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.

    VIX Options Are Priced to VIX Futures, Not the VIX Index

    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.

    Vix call option trading

    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.

    Portfolio Hedging using VIX Calls

    With the CBOE’s introduction of VIX weekly options there should always be options available with less than a week to expiration. The following chart that I generated from VIX and VIX futures historical data shows the typical relationship.

  1. The VIX options are European exercise.

    Vix call option trading

    That means you can’t exercise them until the day they expire. It is common for these options to be trading at levels much different than you would expect for American style, early exercise capable options.

    Trading VIX Options (3 Things You Need to Know)

    The prices only start relating closely to the VIX spot price on the expirations day.

  2. 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.
  3. The expiration or “print” amount when VIX options expire is given under the ^VRO symbol (Yahoo) or $VRO (Schwab).

    This is the expiration value, not the opening cash VIX on the Wednesday morning of expiration.

    Popular Posts

    VIX options expire at market open on expiration day, so expiring options are not tradeable during regular hours on that day.

  4. VIX options do not expire on the same days as equity options. It is almost always on a Wednesday.

    Cryptocurrency traders are not real traders

    This odd timing is driven by the needs of a straightforward settlement process. On the expiration Wednesday the only SPX options used in the VIX calculation are the ones that expire in exactly 30 days.

    Vix call option trading

    For more on this process see Calculating the VIX—the easy part.

  5. The bid-ask spreads on VIX options tend to be wide.

    I have always been able to do better than the published bid / ask prices–always use limit orders. If you have time start halfway between the bid-ask and increment your way towards the more expensive side for you.

  6. I don’t recommend you start trading options on VIX if you aren’t an experienced options trader.

    Implementation

    If you are a newbie trade something sane like SPY options first…

  7. The VIX is not like a stock, it naturally declines from peaks. This means its IV will tend to decline over time.

    Vix call option trading

    As a result, VIX options will often have lower IVs for longer-term options—not something you see often with equities.

  8. The CBOE reports that trading hours are: 9:30am to 4:15pm Eastern time, but in reality, the options do not trade until after the first VIX “print”-when the VIX value in calculated from the first SPX options transactions.

    The first VIX quote of the day is usually at least a minute after opening.

Updated Dec 18, 2019

Categories Advanced Topics, all, Options, VIXTags how to trade VIX options, VIX call options, VIX futures options, VIX option greeks, VIX options, VIX put options, VRO
First posted on