Free VIX option quotes, understanding European exercise on VIX options

Free delayed VIX option quotes are available from:

• CBOE (Symbol VIX, enter symbol in field on left side of the page), check “list all options” radio button
• LIVEVOL (Symbol VIX or ^VIX)  Registration required.  This site has the correct greeks for VIX options, the only site I’m aware of that gets them right.
• freerealtime.com (Symbol VIX.X)
• Yahoo provides VIX index quotes (symbol ^VIX) and in sometimes options quotes.  As of May 23, 2010 these option quotes are not available.

The VIX option symbols listed in the CBOE option chains have an “-e” at the end.  This indicates they have a European style exercise.  Unlike typical stock options which are American style option exercise, the VIX options can not be exercised before their expiration date.

Exercising options early can be attractive if the underlying stock is distributing a dividend, or if you feel the market is not properly pricing the option.  For example, if stock XYZ was at 101 and you hold a 100 strike price call option for stock XYZ that the market bid is 0.50, you would be better off exercising the option and selling the stock.  Your net, ignoring commissions, would be 1.0 per share in this case rather than the 0.50 would have received by selling the option.

This “below intrinsic value” option price might seem an unlikely situation, but with VIX options it happens all the time–usually when the VIX index has had a nice little run up.  VIX options should really be called “VIX Futures” options–because they are based on VIX futures, not the calculated “cash” index updated-by-the-minute that is called the VIX.  Usually if the VIX index runs way up, the futures lag significantly–leaving the options lagging lower in the same way.

The “Futures” was probably left off by the marketing types because they figured (correctly) that it would scare folks off.  Their only defense is that there is one point at time, the moment when the futures and options expire ,that VIX and the VIX options are forced into close alignment.   This alignment point is captured with the monthly VRO quote, which is close to, but not exactly the same as the VIX index value on expiration Wednesday opening.     Given the nature of the VIX index / VIX futures relationship the VIX options folks had no choice but to use European exercise for their options. VIX options are cash settled.