Getting the correct greeks for VIX options


Updated: Nov 8th, 2015 | Vance Harwood

Most software packages that report option Greeks (e.g., delta, gamma, theta, implied volatility) report incorrect values for VIX options (LIVEVOL is a notable exception). Depending on the date and state of the market they can vary from almost correct to widely wrong–giving truly nonsense numbers.  These packages assume that  the VIX index is the underlying for the VIX options.  This is wrong.  The true underlying is the corresponding VIX future for that month (e.g., January VIX futures for January VIX options).  Fidelity gets partial credit because they use the first-month future as the underlying instead of the VIX for all the VIX option series.

You can compute reasonably accurate delta and gamma values for VIX options yourself. You don’t even have to get a futures quote (although you can get CFE delayed quotes for free). It turns out that if you add 10 to the $10 strike VIX call option you are pretty close to the true price for the underlying volatility futures.  Since the bid / ask spreads for these options tends to be pretty wide, you should split the the bid/ask price.  This should get you within +-.15 of the true price.  Then you can use  options calculators to compute your IV and other greeks based on the underlying price and option price.  One example :

$10 Strike  VIX option price is:   bid 14.20 / asked 14.90.  Splitting the difference gives: 14.55
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True VIX Option Underlying = 10+ S10 VIX option price = 24.55
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Closing price of S22.5 VIX Call  bid 1.85, asked 2.2 (splitting this spread gives 2.10).
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VIX Index True VIX option underlying (volatility future)
Underlying 24.40 24.55
Delta .86 .91
Gamma .11 .09
IV 143 82 (correct number)
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Normally the VIX index and the true VIX option underlying are farther apart, so the IV differences are even larger, but in this example there was only one more trading day for the options so the index and true underlying  are converging.
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So beware of brokers quoting VIX option greeks—they are usually lying about the underlying.

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Sunday, November 8th, 2015 | Vance Harwood
  • Tom

    Option greeks are partial derivatives usually calculated under a Black Scholes or binomial model.  These models do not apply to the VIX because it is mean reverting and options on it do not have to satisfy put-call parity (since you can’t actually trade the index).  You can see this easily by the wide difference in implied volatilities for put and call options of the same strike.  Normally, European options have to have very similar IV’s to satisfy put-call parity.

    Its nice to recognize the true underlying is a futures contract and not the index itself, but the option greeks you get are still erroneous.

  • Amg11901

     But deep OTM Calls and deep ITM put seem to comply with black scholes

  • vance3h

    Hi Tom, I agree that Theta for VIX options does not follow Black / Scholes because of mean reversion, but I believe B&S delta / gamma calculations only need the log-normal distribution assumption, which I believe VIX futures, the true underlying exhibits. I think put/call parity works just fine with VIX optiond if you use the correct VIX future as the underlying.

    — Vance

  • vance3h

    Hi, I just responded to this comment. I agree with you that put/call parity works fine with VIX options if you use the correct underlying. Theta is problematic, but almost anything would be better than the current industry practice (except for LiveVol and perhaps a couple others) of using the VIX index as the underlying for their VIX Greek calculations.

    — Vance

  • erbarone

    Tom, you are great! your points are not disputable, and the distribution of returns of the VIX future is far from log normal!