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Category: Options Trading

tastytrade Analysis Tab (Trading Platform Tutorial)

Posted on by Chris Butler

Last updated on September 4th, 2024 , 12:47 pm

The tastyworks trading platform is what we use to trade stock, options and futures. tastyworks has changed the trading industry by introducing a revolutionary commission structure (close trades for free, $10 commission-cap per option leg, and more), and a clean, intuitive trading platform.

In this tastyworks tutorial, we’ll cover the analysis tab, which is where you can visualize and analyze a trade’s profit and loss potential before placing the trade. More specifically, you’ll learn:

✓ How to access the Analysis Tab on the tastyworks trading platform.

✓ How to interpret the risk profile graph.

✓ Changing the Evaluate At Date and Implied Volatility inputs to gauge options strategy performance in different scenarios.

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Additional Resources

Analysis mode on the tastyworks desktop platform – tastyworks

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tastytrade Positions Tab (Trading Platform Tutorial)

Posted on by Chris Butler

Last updated on September 4th, 2024 , 12:48 pm

tasty positions tab

The tastyworks trading platform is what we use to trade stock, options and futures. tastyworks has changed the trading industry by introducing a revolutionary commission structure (close trades for free, $10 commission-cap per option leg, and more), and a clean, intuitive trading platform.

In this tastyworks tutorial, we’ll cover the positions tab, which is where you can access and analyze the performance of all your portfolio positions. More specifically, you’ll learn:

✓ How to access the Positions Tab on the tastyworks trading platform.

✓ How to customize the metrics/columns seen on the Positions Tab.

✓ Using the Profit Target % and other key features.

 

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Additional Resources

Desktop Platform Overview Video – Support : tastyworks

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tastytrade Trade Tab (Ultimate Trading Platform Tutorial)

Posted on by Chris Butler

Last updated on September 4th, 2024 , 12:49 pm

tasty trade tab

The tastyworks trading platform is what we use to trade stock, options and futures. tastyworks has changed the trading industry by introducing a revolutionary commission structure (close trades for free, $10 commission-cap per option leg, and more), and a clean, intuitive trading platform.

In this tastyworks tutorial, we’ll cover the trade tab, which is where you can access all of a stock’s options, set up strategies, analyze trades, and execute orders. More specifically, you’ll learn:

✓ How to access the Trade Tab on the tastyworks trading platform.

✓ How to filter standard/non-standard option expiration cycles.

✓ Customizing the columns seen on the option chain.

✓ How to interpret the Trade Info metrics (POP, EXT, P50, Delta, Theta, Max Profit, Max Loss).

✓ How to adjust strike prices, trade quantities, and expiration cycles with the click of a button.

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tastyworks Demo: Trade Tab – tasty Extras | tastytrade

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Why Trade With tastytrade? ​(Ultimate Platform Overview)

Posted on by Chris Butler

Last updated on September 4th, 2024 , 12:49 pm

The tastyworks trading platform is what we use to trade stock, options and futures. tastyworks has changed the trading industry by introducing a revolutionary commission structure (close trades for free, $10 commission-cap per option leg, and more), and clean, intuitive trading software.

In this tastyworks video, we’ll take a look at the tastyworks commission structure and their trading software so you can see how traders of all types can benefit when trading with tastyworks.

Back to tastyworks Tutorials

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Analysis mode on the tastyworks desktop platform – tastyworks

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tastytrade Trading Platform Tutorials (Video Library)

Posted on by Chris Butler

Last updated on September 4th, 2024 , 12:50 pm

Learn how to use the tastyworks trading platform with our collection of video tutorials!

 
Why tasty
tasty trade tab 2
tasty analysis tab

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Desktop Platform Overview Video – Support : tastyworks

Implied Volatility Guides (with Visual Examples)

Posted on by Mike Martin

Last updated on March 29th, 2022 , 03:18 pm

falling stock

7 guides to help you master topics related to implied volatility (option prices).

Implied Volatility Basics

Implied volatility represents a stock’s option prices, and is one of the most important options trading concepts to master.

 
Read Guide

What is the VIX Index?

vix chart

The VIX Index is a commonly watched indicator, as it measures option prices on the S&P 500 Index.

 

Read Guide

The Expected Move

The “expected move” represents a probabilistic forecast for a stock’s price in the future.

Read Guide

Trading VIX Options

Want to trade VIX options? Be sure to understand common misconceptions.

Read Guide

Trading VIX Futures

VIX futures can be used to trade expectations related to changes in the VIX Index.

Read Guide

The VIX Term Structure

The VIX term structure represents the relationship between near-term and long-term VIX futures contracts.

Read Guide

IV Rank vs. IV Percentile

How do you know if a stock’s current implied volatility is high or low relative to its historical levels? IV rank and percentile can help.

Read Guide

Mastered implied volatility? Move on to the Greeks next!

 

Option Greeks Home

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Additional Resources

Implied Volatility for Trading Options | tastytrade

Historical and Implied Volatility – The Options Industry Council

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IV Rank vs. IV Percentile: Which is Better?

Posted on by Chris Butler

Last updated on April 14th, 2022 , 09:35 am

IV rank vs IV percentile formulas

When trading options, understanding both IV rank and IV percentile can be very advantageous – but is one metric more beneficial than the other? In this article, projectfinance will stack these two volatility metrics side by side – and declare a winner!

Stocks and Implied Volatility

All stocks in the market have unique personalities in terms of implied volatility (their option prices). For example, one stock might have an implied volatility of 30%, while another has an implied volatility of 50%. Even more, the 30% IV stock might usually trade with 20% IV, in which case 30% is high. On the other hand, the 50% IV stock might usually trade with 75% IV, in which case 50% is low.

So, how do we determine whether a stock’s option prices (IV) are relatively high or low?

The solution is to compare each stock’s IV against its historical IV levels. We can accomplish this by converting a stock’s current IV into a rank or percentile.

 

  • Care to watch the video instead? Check it out below!

Implied Volatility Rank (IV Rank) Explained

Implied volatility rank (IV rank) compares a stock’s current IV to its IV range over a certain time period (typically one year).

Here’s the formula for one-year IV rank:

 

iv rank formula 2

For example, the IV rank for a 20% IV stock with a one-year IV range between 15% and 35% would be:

 

iv rank example

An IV rank of 25% means that the difference between the current IV and the low IV is only 25% of the entire IV range over the past year, which means the current IV is closer to the low end of historical volatility. 

Furthermore, an IV rank of 0% indicates that the current IV is the very bottom of the one-year range, and an IV rank of 100% indicates that the current IV is at the top of the one-year range.

Implied Volatility Percentile (IV Percentile) Explained

Implied volatility percentile (IV percentile) tells you the percentage of days in the past that a stock’s IV was lower than its current IV.

Here’s the formula for calculating a one-year IV percentile:

 

IV percentile formula

As an example, let’s say a stock’s current IV is 35%, and in 180 of the past 252 days, the stock’s IV has been below 35%. In this case, the stock’s 35% implied volatility represents an IV percentile equal to:

 

IV percentile formula example

An IV percentile of 71.42% tells us that the stock’s IV has been below 35% approximately 71% of the time over the past year.

Applications of IV Rank and IV Percentile

Why does it help to know whether a stock’s current implied volatility is relatively high or low? Well, many traders use IV rank or IV percentile as a way to determine appropriate strategies for that stock.

For example, if a stock’s IV rank is 90%, then a trader might look to implement strategies that profit from a decrease in the stock’s implied volatility, as the IV rank of 90% indicates that the stock’s current IV is at the top of its range over the past year (for a one-year IV rank).

On the other hand, if a stock’s IV rank is 0%, then options traders might look to implement strategies that profit from an increase in implied volatility, as the IV rank of 0% indicates the stock’s current implied volatility is at the bottom of its range over the past year.

So, with IV rank and IV percentile at your disposal, which one should you use? Is one better than the other? In the next section, we’ll compare the two metrics visually, and explain why one may be better than the other.

IV Rank vs. IV Percentile: Which is Better?

iv rank vs iv percentile

So, at this point you know about IV rank and IV percentile as a means to gauging a stock’s current vs. historical levels of implied volatility, but which one should you use?

IV Rank Doesn't Tell the Whole Story

Recall that IV rank tells you where a stock’s current implied volatility lies relative to its IV range over a certain period of time, typically a year.

One of the issues with IV rank is that if a stock’s IV surges to an abnormally high level, almost all IV rank readings going forward will be low, even if the stock’s current IV is still relatively high.

As an example, consider the following chart:

If you focus your attention on the very first days in this chart, you’ll notice that the S&P 500 implied volatility was around 22.5%, which translated to an IV rank over 75%. However, later on in the year implied volatility spikes to 40%. In the shaded region on the very right of the graph, you’ll notice that implied volatility rises to 25%, but now IV rank is less than 50%.

When IV falls after a massive surge in implied volatility, IV rank readings will be low even when the implied volatility of the stock price is still relatively high. In this example, the implied volatility of the S&P 500 is below 20% almost the entire year, but after the significant spike in implied volatility, the IV of 25% translates to an IV rank less than 50% later in the year.

Now, let’s look at the same time period, except this time we’ll examine IV percentile:

 

As we can see, even after the spike in implied volatility to 40%, the rise in implied volatility to 25% at the end of the year translated to an IV percentile of 93%, indicating that implied volatility was below 25% in 93% of the days over the past year.

Now, when the implied volatility of the S&P 500 spiked to 40%, what would happen if it stayed at 40% for an extended period of time? Well, IV rank would be pinned at 100%, telling you that the 40% IV is the highest implied volatility the S&P 500 has seen over the past year. However, IV percentile would fall, as the 40% IV becomes more “normal.” So, when a market’s implied volatility personality changes, IV percentile will be the first to let you know.

Final Word

IV Percentile

So, the bottom line is that IV rank or IV percentile can be used to gauge a stock’s level of implied volatility (current level of volatility) relative to its historical levels of implied volatility. However, IV percentile tells you more of the story, and serves as a better “mean-reversion” indicator. Furthermore, IV percentile doesn’t suffer from the flaw of IV rank after an abnormally large increase in implied volatility.

Back to Volatility Guides ➥

IV Rank vs IV Percentile FAQs

IV rank and IV percentile are not the same. Both IV rank and IV percentile examine current levels of implied volatility, but they do so using different metrics. IV rank compares present IV to both high and low volatility levels over the past 252 days; IV percentile tells us the percentage of days over the last year when IV was lower than its present level.

IV rank tells us whether the current implied volatility is high or low in relation to the historic one year volatility of an underlying. 

When the IV percentile for an underlying is high, that implies option premiums will also be elevated. This may be a good time to sell premium using options strategies such as strangles, straddles, vertical spreads (credit spreads) and iron condors. However, if you believe the stock price will experience even higher volatility in the short-term, debit spreads may be more appropriate. 

Additionally, with low IV percentile, traders tend to favor net long positions in options. 

Next Lesson

Additional Resources

CBOE Volatility Index: Live Data

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VIX Term Structure – The Ultimate Guide w/ Visuals

Posted on by Chris Butler

Last updated on March 16th, 2022 , 01:23 pm

The VIX term structure (sometimes called the “VIX futures curve”) is the relationship between the prices of short-term and long-term VIX futures contracts. 

The shape of the VIX futures prices when plotted (upwards, downwards, or flat) indicates whether the market is expecting more or less market volatility in shorter-term or longer-term periods.

Additionally, the shape of the VIX futures curve has implications for the performance of volatility-related products.

The shape of the VIX term structure will fall into one of three categories:

➼ Contango (Upward Sloping): Longer-term VIX futures contracts are more expensive than shorter-term contracts. Contango tends to occur in quiet market periods and is also the most common shape of the VIX futures curve.

➼ Backwardation (Downward Sloping): Longer-term VIX futures contracts are less expensive than shorter-term contracts. Backwardation tends to occur during periods of extreme market volatility.

➼ Flat: Longer-term VIX futures contracts are about the same price as shorter-term contracts.

To understand each of these curves, let’s look at an example of each scenario.

Contango: Upward-Sloping VIX Futures Curve

The following chart demonstrates what an upward-sloping (contango) VIX term structure looks like:

 

VIX Term Structure (VIX Futures Curve) in Contango

Data gathered from the Cboe’s Historical VIX Futures Database

In this example, the VIX Index itself is just above 13 while the August VIX future (approximately 120 days away from settlement) is six points higher at 19. The upward sloping nature of the curve suggests that market participants believe volatility will increase from 13 in the future, which makes sense because the long-term average VIX level is around 20.

In the event that the VIX Index (prices of S&P 500 options) remains around 13, the price of each of these VIX futures contracts will lose value as time passes.

Consequently, any long VIX futures traders will lose money, as well as traders who have on bullish trades in related volatility products (bullish VIX option trades, VXX, UVXY, etc.). On the other hand, traders with short VIX futures contracts or bearish positions in volatility products will are likely to profit (bearish VIX option trades, long XIV or SVXY, etc.).

Backwardation: Downward-Sloping VIX Futures Curve

The following chart demonstrates what a downward-sloping (backwardated) VIX term structure looks like:

 

VIX Term Structure (VIX Futures Curve) in Backwardation

Data gathered from the Cboe’s Historical VIX Futures Database

In this case, the VIX Index is above 27. However, the June VIX futures contract (roughly 150 days until settlement) is four points lower at 23. The downward-sloping nature of the curve suggests that market participants believe volatility will decrease from 27 in the future, which makes sense because the long-term average VIX level is around 20.

In the event that the VIX Index (prices of S&P 500 options) remains around 27, the price of each of these VIX futures contracts will “slide up the curve” as time passes. Consequently, any short VIX futures traders will lose money, as well as traders who have on bearish trades in related volatility products (VIX options, VXX, UVXY, etc.). However, any traders who are long VIX futures or have bullish positions in volatility products are likely to make money.d

Flat VIX Futures Curve

In the final example, we’ll look at a relatively flat VIX term structure from early 2016:

 

Flat VIX Term Structure (VIX Futures Curve)

Data gathered from the Cboe’s Historical VIX Futures Database

In this case, the VIX index is at 20 while the five subsequent VIX futures contracts are near 21. While not exactly equal, this VIX futures curve can be described as flat. When the VIX term structure is flat, long and short volatility trades don’t stand to gain or lose too much money if the VIX remains at its current level of 20. However, this could change quickly if the shape of the curve transitions into steep contango or backwardation.

Additional Resources

1) Cboe Volatility Index (VIX) Futures

2) Settlement Information for VIX Derivatives

3) Real-Time & Historical VIX Term Structure Data

Back to Volatility Guides ➥

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CBOE Volatility Index: Live Data

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Trading VIX Futures | Options Volatility Guide w/ Visuals

Posted on by Chris Butler

Last updated on March 14th, 2022 , 06:35 pm

The Cboe VIX Index measures prices of 30-day option prices (implied volatility) on the S&P 500 Index. Since option prices are an indicator of fear or complacency in the marketplace, the VIX is sometimes viewed as a “fear index” that gauges the level of uncertainty in market participants.

As mentioned in our guide on the VIX Index, the VIX cannot be traded directly, but there are products that allow traders to gain exposure to changes in the VIX Index. VIX futures are one of the products available when trading volatility.

The following visual demonstrates how a future on the VIX can change relative to the VIX Index:

 

VIX Futures vs. VIX Index

As we can see here, the price of the VIX futures contract changes in the same direction as the VIX Index, but not by the same amount in this case (we’ll discuss this in-depth shortly).

VIX Futures Contract Characteristics

Before discussing the most important things to be aware of when trading VIX futures contracts, let’s go over the basic characteristics of each contract.

vix characteristics

Perhaps the most important aspect to be aware of when trading VIX futures is that the contract multiplier is $1,000, which means each point change in the contract is equal to a $1,000 change in value. 

For example, if a trader buys one contract at 15 and sells the contract at 16, the profit on the trade is $1,000. Conversely, if a trader buys a contract at 20 and sells the contract at 15, the loss on the trade is $5,000.

Because of this, VIX futures are very large contracts that should be traded cautiously, especially since the margin requirement to trade one contract can be as low as a few thousand dollars (the margin will vary depending on the brokerage firm and market volatility).

Another vital point to mention is that the minimum tick value of a VX contract is $0.01, which translates to a bid-ask spread of $0.01. With a contract multiplier of $1,000, a $0.01 tick represents $10 in actual profits or losses. So, a trader would lose $10 by purchasing at the ask price and selling at the bid price, or vice versa (assuming a $0.01 bid-ask spread)

Regarding the settlement value, each VIX futures contract will settle to the value of VRO on the Wednesday morning that is 30 calendar days prior to the subsequent standard S&P 500 Index options expiration. The VRO settlement value comes from a VIX-style calculation on that Wednesday morning.

In terms of the contracts available, weekly contracts have recently been created, but the volume and open interest in the weekly contracts are still extremely low, so trading the standard monthly contracts is far superior to the weekly contracts in terms of liquidity.

Lastly, VIX futures contracts are priced based on the supply and demand of the contracts, which is different from the calculated value of the VIX. So, if the VIX changes in one direction, a future on the VIX might not change at all. In fact, it’s possible for the contracts to move in the opposite direction of the VIX Index. However, as settlement approaches, volatility futures will track the VIX Index much more closely.

Things You Need to Know Before Trading VIX Futures

Before trading a VIX futures contract, these are the most important things you need to be aware of:

1) Longer-term contracts typically have more risk in terms of carrying costs.

2) As a VIX future gets closer to its settlement date, the contract’s price will converge to the VIX Index price, as well as become more sensitive to changes in the VIX Index.

Let’s visualize each of these points by looking at some historical VIX futures data.

VIX Futures Carrying Costs (in Contango)

When holding VIX futures contracts, traders are exposed to profits or losses as the contract converges to the VIX Index. 

When the VIX is low, the futures contracts tend to be priced higher than the index (referred to as contango). As time passes, the futures contracts will decay in price towards the VIX Index if the VIX doesn’t increase.

The following visual illustrates the concept of decaying volatility futures contracts as time passes (the dashed lines represent the settlement dates for each respective contract):

VIX Futures Contango Convergence

Data from Cboe’s Historical VIX Futures Data

At the beginning of the period, each product had the following price and potential loss from purchasing the contract:

The values in this table come from the potential loss when buying and holding a VIX futures contract. For example, if a contract is purchased at 15.42 and decreases to 13.10, the loss will be $2,320. If the contract was shorted at 15.42 and the price fell to 13.10, the profit would be $2,320. However, selling volatility futures has significant risk because the VIX tends to rise very quickly when the market falls (as demonstrated in the previous visual).

So, the next time the VIX Index hits new lows, be wary of buying VIX futures to profit from the inevitable implied volatility expansion. If a volatility trader does not correctly time the increase in the VIX when trading VIX futures, the trader may lose substantial sums of money from the price decay of the contracts when the curve is in contango.

VIX Futures Carrying Costs (in Backwardation)

When the VIX is abnormally high, the futures contracts tend to be priced lower than the index (referred to as backwardation). As time passes, the futures contracts will increase in price towards the VIX Index if the VIX doesn’t decrease.

The following visual illustrates the concept of increasing volatility futures contracts as time passes:

VIX Futures Backwardation Convergence

Data from CBOE’s Historical VIX Futures Data

As we can see here, when the VIX Index surges, the prices of VIX futures tend to trade at lower prices than the index because the market doesn’t expect the VIX to stay at such elevated levels for long. In this scenario, carrying costs are transferred to the sellers of VIX futures, as increasing contract prices lead to losses for sellers. As an example, let’s look at the closing prices of each product on October 14th, 2008:

So, with the VIX at 55.13 and the December VIX future at 32.20, the December VIX future could increase by 22.93 if the VIX stays at 55.13 through the December contract’s settlement. For a trader who sells the contract, an increase of 22.93 results in a loss of $22,930. Of course, these values turn into profits for the buyers of each contract.

In summary, when the VIX Index reaches abnormally high levels, the VIX futures will often be cheaper than the index. Before selling a VIX future to profit from the inevitable volatility collapse, understand that incorrect timing of the volatility decrease may lead to significant losses due to the gradual increase in the contract’s price.

Additional Resources

1) Contango and Backwardation Explained

2) VIX Futures and Options Fact Sheet

Back to Volatility Guides ➥

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Here’s How to Trade VIX Options (3 Things to Know)

Posted on by Chris Butler

Last updated on May 3rd, 2022 , 08:26 am

VIX Options

VIX Definition: In the stock market, VIX is the ticker symbol for Chicago Board Options Exchange’s CBOE Volatility Index. This “fear gauge” index measures expected stock market volatility using options (derivatives) on the S&P 500 index.

VIX Option Nuances

In this section, we’ll cover two of the biggest VIX option nuances:

1) VIX options are not priced to the Index because the VIX does not have any tradable shares. Instead, VIX options are priced to the volatility future with the same settlement date.

2) VIX options settle to a Special Opening Quotation (SOQ) under the ticker symbol VRO. VRO is a VIX-style calculation that uses the opening prices of SPX options on the morning of settlement.

Care to watch the video instead? Check it out below!

TAKEAWAYS

 

  • VIX index options are priced to VIX futures.
    |
  • VIX options are settled European style; this means settlement is done in cash and early exercise/assignment is not possible.

  • Long-term VIX options are less sensitive to changes in implied volatility than short-term options.

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

One of the biggest nuances of options on the VIX is that they are not priced to the VIX Index. Why is this?

The VIX Index can’t be traded directly, so there are no shares that can be traded to keep the VIX option prices in-line with the Index. 

To demonstrate this, we can examine the intrinsic value of deep-in-the-money options on various products:

options intrinsic value

An option must be worth at least the amount of its intrinsic value. Because of this, something is clearly not right between the price of the VIX put and the VIX index.

If we look at the price of the VIX future with the same settlement date as this put option, the intrinsic value problem will no longer exist:

As we can see, the deep-in-the-money January VIX put is priced almost perfectly to the price of the January volatility future. So, don’t be fooled by any potential “mispricings” when examining options on the VIX.

To hammer this point home one last time, we’ll visually compare the prices of the VIX index and the cost of a long synthetic stock position (strike price of synthetic + cost of synthetic) on the VIX. A long synthetic stock position consists of a long call and short put at the same strike price, and in the same expiration. As the name suggests, a synthetic stock position should replicate a position in the underlying shares.

On the VIX, this means the synthetic should track the underlying product price (the VIX) very closely. Let’s take a look at the long synthetic in VIX options compared to the VIX Index:


VIX Options Pricing vs. VIX Index

Clearly, the cost of the long synthetic does not match up well with the price of the index, as it would with standard equity options on non-dividend stocks. However, if we add in the price of the future that corresponds to the options on the VIX, they should track each other almost perfectly:


VIX Option Pricing vs. VIX Futures

Note that any subtle differences between the price of the synthetic stock position and the VIX future can be attributed to using the mid-price of the options in the synthetic and the mid-price of the VIX future.

Why Are VIX Options Priced to VIX Futures?

Options on the VIX are european-style, which means they can’t be exercised until the expiration date. Additionally, they’re cash-settled, as the VIX doesn’t have tradable shares that can be purchased or sold by exercising. So, if you own a 15 call on the VIX and the VIX Index spikes to 30, you can’t exercise your option to buy VIX shares at 15 to sell them at 30. Instead, your P/L is determined by where 30-day implied volatility is expected to be on VIX settlement day, which is represented by the corresponding VIX futures price.

Additionally, VIX options and futures settle to the same number (VRO) at expiration. VRO is a Special Opening Quotation (SOQ) that uses the actual opening prices of SPX options expiring in 30 days in a VIX-style calculation. VRO represents the 30-day implied volatility on the morning of settlement.

A futures contract with no more future/time to settlement must be equal to the spot price (the current market price) of the product that the future represents. So, an implied volatility future at settlement is equal to the actual implied volatility at the time of settlement (the VIX-style calculation at settlement, under the ticker symbol VRO).

VIX Option Settlement Examples

Now that you know the basics of how options on the VIX work, let’s go through some settlement examples.

In the following table, we’ll compare the final settlement value of options on the VIX based on VRO on the day of settlement.

As we can see here, the settlement values of VIX options has nothing to do with the VIX opening price on the morning of settlement. Additionally, VRO is likely to differ from the VIX open because VRO uses the actual opening prices of SPX options on the morning of settlement, as opposed to using the mid-price like the VIX calculation.

Because of this, it may be wise to close profitable VIX option positions on the Tuesday before VIX settlement, as holding through settlement may lead to unfavorable settlement prices.

Additionally, options on the VIX are cash-settled, which means traders with VIX option positions will receive the value of VIX options at expiration, as opposed to shares in the underlying like they would with standard equity options.

For example, if a trader bought the 15 call for $5.00 and the option settled at $8.76, the P/L on the trade would be +$376 per contract: ($8.76 settlement value – $5.00 purchase price) x 100 = +$376.

Short-Term vs. Long-Term VIX Option Sensitivity

When trading VIX options, you might wonder why you don’t just trade the longest-term VIX options to allow more time for your positions to profit.

The answer is that not all VIX options have the same sensitivity to changes in market implied volatility. When examining movements of the VIX Index and futures, you’ll notice that the VIX Index is more responsive to market movements compared to VIX futures with more time until settlement.

As a result, longer-term options on the VIX are less sensitive to changes in implied volatility.

Consider the following visualization of three different VIX futures contracts in 2008:

 

VIX Futures Sensitivity

Between September 2nd and October 10th, the following movements occurred in each volatility product:

vix expirations

Let’s compare the changes in the call options with strike prices of 20 over the same period:

 

VIX Futures Sensitivity

As we can see, when the VIX increased from 20 to 70, the October 20 VIX call increased from $3.90 to $35.00, while the December 20 VIX call only increased from $4.20 to $14.10.

While trading long-term options on the VIX might give you more time to be right, volatility will need to experience much more significant changes for your positions to profit.

Back to Volatility Guides ➥

VIX Options FAQs

The VIX index draws from both call and put options with more than 23 days and less than 37 days to expiration. 

The best way to directly bet against the VIX is to use bearish options trading strategies on the VIX itself, such as the bear call spread and bull put spread. 

Additionally, investors can purchase SVXY, ProShares Short VIX Short-Term Futures ETF. Because of contango, this ETF tends to shed value faster than the VIX. 

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Additional Resources

CBOE Volatility Index: Live Data

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