Thirteen Things You Should Know About Trading VIX options

If you want to trade options on fear I’ve listed some things below that you should know.  If you are interested in other volatility investments besides options see “10 Top Questions About Volatility“.  Regarding VIX options:

  1. Your brokerage account needs to be a margin account, and you need to sign up for options trading.   There are various levels of option trading available (e.g., the first level allows covered calls).  My experience is that to trade VIX options you will need to be authorized to trade at the second level.  These levels vary from brokerage to brokerage, so you will have to ask what is required to be long  VIX options.  If you are just getting into options trading this is as high as you want to go anyway. Selling naked calls for example, is not something for a rookie to try.
  2. No special permissions are required from your broker for VIX options. In general, the same sort of restrictions (e.g., selling naked calls) that apply to your equity option trading will apply here.
  3. Calendar spreads aren’t allowed (at least within my account, with my level of trading). The software didn’t prevent my entering the order, but the order was canceled once I entered it and I got a call from the broker—ok, what did I do now?  The reason for this restriction is because VIX options with different expirations don’t track each other well. More on that later.
  4. The option greeks for VIX options (e.g. Implied Volatility, Delta, Gamma) shown by most brokers are wrong (LIVEVOL and Scwhab are notable exceptions).  Most options chains that brokers provide assume the VIX index is the underlying security for the options, in reality, the appropriate volatility future contract should be used as the underlying. (e.g., for May options the May VIX futures are the underlying).  To compute reasonably accurate greeks yourself go to this post.
  5. While technically not the actual underlying, VIX futures act as if they were the underlying for VIX options—the options prices do not closely track the VIX.  A big VIX spike will be underrepresented, and likewise, a big drop probably will not be closely tracked.  This is a huge deal. It is very frustrating to predict the behavior of the market, and not be able to cash in on it. The only time the VIX options and VIX are guaranteed to sort-of match is on the morning of expiration—and even then they can be different by a couple of percent.  The closer the VIX future and the associated VIX option are to expiration, the closer they will track the VIX.  With the CBOE’s introduction of VIX weekly options there should always be options available with less than a week to expiration. The following chart from the CBOE shows the typical relationship.



  1. The VIX options are European exercise. That means you can’t exercise them until the day they expire. There is no effective limit on how low or high the prices can go on the VIX options until the exercise day.
  2. Expiring In-the-Money VIX options give a cash payout.  The payout is determined by the difference between the strike price and the VRO quotation on the expiration day.  For example, the payout would be $1.42 if the strike price of your call option was $15 and the VRO was $16.42.
  3. The expiration or “print” amount when VIX options expire is given under the ^VRO symbol (Yahoo) or $VRO (Schwab).   This is the expiration value, not the opening cash VIX on the Wednesday morning of expiration.  VIX options expire at market open on expiration day, so expiring options are not tradeable during regular hours on that day.
  4. VIX options do not expire on the same days as equity options. It is almost always on a Wednesday. This odd timing is driven by the needs of a straightforward settlement process.  On the expiration Wednesday the only SPX options used in the VIX calculation are the ones that expire in exactly 30 days.  For more on this process see Calculating the VIX—the easy part.
  5. The bid-ask spreads on VIX options tend to be wide.   I have always been able to do better than the published bid / ask prices–always use limit orders. If you have time start halfway between the bid-ask and increment your way towards the more expensive side for you.
  6. I don’t recommend you start trading options on VIX if you aren’t an experienced options trader. If you are a newbie trade something sane like SPY options first…
  7. The VIX is not like a stock, it naturally declines from peaks. This means its IV will always decline over time. As a result, VIX options will often have lower IVs for longer-term options—not something you see often with equities.
  8. The CBOE reports that trading hours are: 9:30am to 4:15pm Eastern time, but in reality, the options do not trade until after the first VIX “print”-when the VIX value in calculated from the first SPX options transactions. The first VIX quote of the day is usually at least a minute after opening.

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