• WHO KNEW 20 years ago that volatility
would become such a popular topic in market discussions? When the CBOE introduced
the original VIX in 1993, it was an esoteric,
“professionals-only” thing. Now we're seeing
the price of the VIX on our trading platforms
and TV, we’re interpreting volatility’s impact
on the markets, and yes, we’re trading it.
Trading activity in the VIX suite of products—/VX futures and VIX options—has
exploded in recent years. Notably, in the past
couple of years, /VX futures and VIX options
with weekly expirations have been introduced.
And different expirations offer more flexibility
and strategies for speculating on volatility.
Mix ’n’ Match
But all those /VX and VIX expirations can
spell trouble if you don’t understand the relationship between them. For example, looking
at VIX options, you may see that a call in a
further expiration has a lower price than a
call at the same strike price at a closer expiration. Or you may want to trade a synthetic
covered call—buy a /VX future and sell VIX
calls against it. But you have multiple expirations in /VX and VIX options. Doing mix
’n’ match with VIX products can expose you
to risk you might not want to take. So how do
you match up the /VX and VIX options so
you can potentially avoid trouble ahead?
The short answer: when you’re looking at,
or trading, VIX options in a particular expiration, you need to consider trading the /VX
future in the same expiration. So, you match
up September VIX options with the September /VX future. Or August weekly VIX options with the August weekly /VX future with
the same number of days to expiration (DTE).
Make sure the VIX options have the same
number of DTE as the /VX futures. This is
important. The VIX options in a particular
expiration are “priced” off their corresponding /VX future, and not the VIX index
itself—because you can’t trade the VIX. You
need to hedge with a /VX future. And /VX
futures in different expirations move up and
down independent of each other, according
to the market’s expectation of what the VIX
will be on those future dates.
There’s no arbitrage relationship that
keeps /VX futures in a specific financial
relationship to each other. This is why VIX
options in further expirations can have lower
prices than VIX options in closer expirations.
VOL WHISPERER • SEASONED
IN THE MONEY
You’re So VIXed
BIG IDEA: WHICH VIX FUTURES DO VIX OPTIONS FOLLOW?
HOW DO YOU TRACK ’EM? KNOW THE DETAILS.