Unlike traditional equity options, which expire on the third Friday of each month, VIX options expire on the first Wednesday of each month. Vix options are often traded, giving investors with strong liquidity, which means that when a broker fills a contract, investors can usually purchase and sell without disruptions or delays.
By CFE
Volatility has emerged as an asset class over the last decade, with VIX Futures leading the way. In 2004, the CBOE Volatility Index (VIX) was used to launch financial futures trading. This was the first time a publicly traded derivative that allowed investors direct exposure to projected market volatility was accessible for trading. If you’re thinking about adding volatility to your trading and portfolio management toolbox, there are a few things to keep in mind before you get started.
What Does the CBOE Volatility Index (VIX) Indicate?
VIX is a standardized measure of near-term volatility based on option pricing for the S&P 500 (SPX).
The VIX is calculated using two separate expiration sets of SPX options, with the two series being time weighted to produce a consistent 30-day measure of implied volatility.
When the S&P 500 is under pressure, the demand for SPX put options rises, causing VIX to rise.
Because of the heightened demand for portfolio protection when the market is under pressure, VIX has earned the moniker “The Fear Index.”
2. The VIX Index and the S&P 500 Index
Traders have been trained to believe that when the S&P 500 falls, VIX increases, and when the S&P 500 rises, VIX falls. This view has some merit because the long-term daily price change connection between the S&P 500 and VIX is extremely close to -0.75. On occasion, though, both the S&P 500 and the VIX move in the same direction. In fact, VIX and the S&P 500 price moves move in the same direction on around 20% of trading days. From January 2004 through July 2016, the table below shows the link between VIX and the S&P 500 on days when equities were higher and days when they were lower.
From August 2015 to July 2016, the daily price action in the S&P 500 and VIX is seen in the chart below.
There have been a few instances where the S&P 500 has dropped off sharply, and VIX has surged in reaction.
Contract Specifications for VIX Futures
A VIX Futures contract has a notional value of $1000 times the index. Futures trade in 0.05 or ($50 a tick) increments, but calendar spreads may be quoted in 0.01 ($10 a tick) intervals. In June 2014, the trading hours for VIX Futures were extended to nearly 24 hours a day, five days a week. Spot VIX is calculated and quoted outside of US trading hours, starting at 2:15 a.m. Chicago time, which is when European markets open.
The CBOE Futures Exchange has been listing VIX Futures expiring each week for multiple weeks in a row for just over a year.
There are also regular VIX Futures contracts that expire every month.
Standard expiration is usually on a Wednesday, which is 30-days before the standard third Friday SPX option expiration date the following month.
The VIX futures quotes from August 15, 2016 are shown in Figure 2.
VIX Weeklys Futures and regular VIX futures are used in the above quotes.
The VIX/Q6 contract is the typical VIX contract for August.
The quotes that start with a number are VIX Weekly Futures, and the numbers denote the week in which these contracts expire.
VIX futures are contracts that are settled in the morning.
The final settlement value for VIX Futures is the VIX Index’s Special Opening Quotation (SOQ). The SOQ is derived from the opening prices of constituent SPX or SPX Weeklys options that expire 30 days following the VIX expiration date. The ticker VRO is used to communicate the final settlement value for VIX futures. The day before settlement is the last trading day for VIX Futures, thus a contract that is set to expire on Wednesday morning will stop trading at 3:15 p.m. Chicago time the day before settlement. This means that on the day of settlement, a contract slated to expire will not trade during non-US hours.
Spot VIX and other VIX futures may trade at a premium or discount to VIX Futures contracts.
The majority of trading days, VIX Futures are trading at a premium to spot VIX as well as futures contracts that expire before the particular contract’s expiration date.
The pricing of spot VIX and regular VIX futures contracts on the Friday before and after the recent Brexit vote is shown in Figure 3.
RISK DISCLAIMER: Trading futures products carries high risk of loss, which must be acknowledged before trading and may not be suitable for all investors. Actual trades or methods referenced above may have performed well in the past, but this does not guarantee that they will perform well in the future. Phillip Capital Inc. bears no responsibility for errors or omissions in the material included herein, which is supplied to you solely for informational purposes and is believed to have been derived from reliable sources but cannot be guaranteed. The author’s thoughts and opinions in this letter are his or her own and do not reflect those of Phillip Capital Inc. or its employees.
When does VIX am go off the market?
The expiration dates for VIX futures and VIX options are the same. It is always 30 days before the expiration of S&P500 options (see why) – usually the third Friday of the next month, unless there are holidays.
The dates indicated here are always the final settlement (expiration) dates, which are usually Wednesdays. The day before is always the last full trading day, which is usually Tuesday. On the final settlement day, expiring futures contracts stop trading at 8:00 a.m. Chicago time / 9:00 a.m. New York time. Expiring options stop trading at the end of the previous day’s regular trading session.
When an expiration is irregular and not on a Wednesday, a note appears in the expiration calendars and histories on this page (typically due to holidays). Only three such monthly expirations have occurred so far (February 2008, March 2014, and March 2019), with a few unusual weekly expirations every year.
Weekly VIX Options and Futures
On July 23, 2015, weekly VIX futures began trading. On October 8, 2015, weekly VIX options began trading. These follow the same principles as monthly futures and options when it comes to expiration. It is always 30 days before the weekly S&P500 option expires, which is normally on a Wednesday unless there are vacations.
On August 5, 2015, the first weekly VIX expiration occurred. Weekly expirations are only reported in the expiration calendars and history on this page if they are irregular (not a Wednesday).
When a VIX call expires, what happens?
VIX options are European-style, meaning they can only be exercised when they reach their expiration date.
VIX options are settled in cash. The Special Opening Quotation (SOQ), which is computed based on the opening prices of S&P500 options on VIX option expiration, determines the settlement value of VIX.
Do VIX options have a morning expiration?
The final settlement value for Volatility Derivatives is determined by a Special Opening Quotation (“SOQ”) of the VIX Index on the morning of its expiration date (typically a Wednesday).
How frequently is the VIX updated?
The VIX Index is priced using a continually shifting portfolio of SPX options, unlike the S&P 500 Index, which is made up of a relatively steady portfolio of equities. In fact, the portfolio of SPX options that make up the VIX Index fluctuates somewhat every minute in order to maintain a consistent maturity of 30 days.
When is it possible to use VIX options?
VIX options are European-style, meaning they can only be exercised at expiration, not before.
- You don’t have to be concerned about ending up with an undesirable VIX position when it expires.
What is quad witching day, and why is it celebrated?
Quadruple witching occurs when four different sets of futures and options expire on the same day in the financial markets.
Futures and options are derivatives that are tied to the price of underlying stocks. Traders must close or change positions when derivatives expire. This can result in a large increase in volume and order flow. The following are the four types of derivatives that will expire on quadruple witching:
Note that some lists of quad-witching expirations include single-stock futures. However, these are little items that have a minor impact on the market.
What’s the distinction between VIX and VXX?
The VIX, or Chicago Board Options Exchange Volatility Index, is the basis for the VXX ETN. By analyzing current prices for put and call options connected to the widely followed index, the VIX represents investors’ views about the S&P 500’s short-term path. The VIX generates an informed forecast as to how much the index will change in the next 30 days. Traders who want to profit from market volatility bets might consider the VXX.
What is the price of an SPX option?
Premiums$1 is $0.44, while SPX costs are divided into two tiers. Only the first 20,000 contracts per order will be charged SPX customer transaction costs.
How is the spot VIX determined?
The VIX is derived by multiplying the number of days in a month by the number of days in “By averaging the weighted prices of out-of-the-money options and calls, you may compute predicted volatility.” In the example below, we’ll start on the far left of the formula with options that expire in 16 and 44 days, respectively. On the left, there is a symbol ” symbolizes the result of multiplying the square root of the sum of all the integers to the right by 100.
