A VIX option is an options contract that gives the holder the right, but not the obligation, to buy or sell a security at a specific price within a certain period. The value of a VIX option is based on changes in the CBOE Volatility Index (VIX).
The VIX is a measure of market uncertainty and expectations for future volatility. It is often referred to as the “fear index” because it tends to spike when markets are fearful and falls when they are complacent.
There are two main reasons why traders might want to trade VIX options:
- To speculate on future market volatility
- To hedge against a sharp decline in the stock market
Find a broker that offers VIX options
There are a limited number of brokers that offer VIX options. You must open an account with one of these brokers to trade VIX options. Some popular brokers offering VIX options include Interactive Brokers, TD Ameritrade, and Charles Schwab.
Know the expiration date
VIX options have monthly expiration dates. The last day to trade most VIX options is the Wednesday before expiration. VIX options settle in cash on the Friday following expiration.
Decide if you want to buy or sell
If you believe that the market will be more volatile in the future, you will buy a VIX call option, which gives you the right to buy a security at a specific price within a certain period. If you believe that the market will be less volatile in the future, you will buy a VIX put option, giving you the right to sell a security at a specific price within a certain period.
Choose your strike price
Your strike price is the price at which you can buy or sell the security. VIX options are traded in $2.50 increments. You can choose any strike price within this range.
Choose your expiration date
VIX options expire on the Wednesday before the third Friday of each month. For example, if you are trading a VIX option with a January expiration date, it will expire on the Wednesday before the third Friday in January.
Place your order
You can place a VIX options order online or over the phone with your broker.
Monitor your position
You will need to monitor your position closely as VIX options are susceptible to changes in market volatility. You may want to set up alerts with your broker to notify you of any changes in the price of the option.
Close your position
You can close your position at any time before expiration. If you are long a VIX call option, you will sell the option to close your position. If you are short a VIX call option, you will buy the option to close your position. If you are long a VIX put option, you will buy the option to close your position. If you are short a VIX put option, you will sell the option to close your position.
Benefits of trading VIX options over others
VIX options offer traders a high degree of leverage, which means you can control a prominent position with little capital.
VIX options have limited risk because they are cash-settled, which means you will never lose more than the premium you paid for the option.
The VIX is a relatively predictable index due to the fact that it is heavily tied to stock market performance and the overall health of the economy, so you can have a bit more confidence when trading VIX options compared to other types.
VIX options are accessible to all traders. You don’t need to be a professional trader or have a large account to trade VIX options.
VIX options are highly liquid, so you can quickly enter and exit a position. This is an advantage, as you do not want your money tied up if you want to convert it into cash at any point.
Risks of trading VIX options
VIX options are subject to changes in market volatility, which means that the option’s price can move sharply up or down, resulting in losses.
You will have to pay a premium when you buy a VIX option, which is the price you pay for the option. The premium is non-refundable and is paid regardless of whether or not you make money on the trade.
Check out https://www.home.saxo/en-sg/products/listed-options for more information.