VXX Options—Similarities and Differences with VIX Options


Updated: Nov 9th, 2015 | Vance Harwood

VXX options give a reliable way to effectively short the VXX—at least on Schwab’s trading platform it’s difficult to short VXX itself.  Most of the time  it has been in the “hard to borrow” category.

Comparing VXX options to VIX options:

Similarities:

  • Both are based on S&P 500 volatility futures
  • Will show a strong reversion to baseline behavior when the market is behaving itself—the VIX index and VXX will tend to quickly drop to a lower “stable” value
  • Will not track the peaks of the VIX index.  The volatility futures are tied to future values of volatility (duh) , rather than today’s value—so they tend to move significantly less, although pretty much in time synchronization.  The values jump at the same time, just not as much.

Differences

  • VXX options expire  on Friday for Weeklys or Saturdays—the same day as most equity/ETF options, not on the Wednesday that futures expire for that particular month.
  • The VXX settlement value is the closing value of VXX on the Friday before the options expire, not the once per month VRO settlement value used by the VIX options
  • The VXX, and hence VXX options will be sensitive to the relationship between the current and next month futures prices on volatility.  The VXX shifts its weighting between these two months on a daily basis.  Generally this results in a price erosion force on the VXX  relative to the VIX index because the further out month is usually higher in value than the close in month (called “contango” in futures parlance)
  • The implied volatility of  the VXX options should generally be lower than the equivalent VIX options, because  it is the mix of two months of volatility futures, not one like the VIX options.   For example, for June expiration the volatility should be about the same the day after the May VIX options expire (because both sets of options are tied to June futures) , and the VXX option volatility should decrease relative to the VIX options as the time remaining on the June options decreases and the VXX picks up more weighting in the July volatility futures.
  • The VXX options quotes/option chains will be easier to find and their greeks will be correct.   Many brokers including Schwab report incorrect greeks for VIX options—the CBOE’s  LIVEVOL  being the only exception I am aware of.  Fidelity gets partial credit—their delta and gamma are correct for the next to expire monthly options,
  • The VXX options have American style exercise rather than the VIX option’s European style exercise.  The European style exercise is necessary on the VIX options because the VIX options and VIX index are only guaranteed to be close once—at expiration time.  The VXX and its options will naturally track each other well, so American exercise is ok.  Practically this won’t be a big deal.

In the “no free lunch” category, I predict attempts to use VXX/ VIX options to take advantage of VXX’s historical price erosion compared to the VIX because of futures contango without taking volatility risk will not be profitable.

Summary

VXX options are popular with the retail crowd.  They behave like regular stock options with the same expiration dates, settlement practices, American-style exercise, and available/accurate quotes, option chains, and greeks.  I think the pros will continue to use the VIX options because they provide a purer play on S&P 500 volatility.

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Monday, November 9th, 2015 | Vance Harwood
  • wtell

    Hi,

    If you have a XIV position, how can we use VXX calls to hedge this position
    (maturity, ITM/OTM)?

    Thanks.

  • Hi wtel, I don’t have specific recommendations–nothing is going to be cheap, and full protection is probably prohibitive. You don’t have to limit yourself to VXX, you could use UVXY calls too since they’re all linked to the same futures. This post http://sixfigureinvesting.com/2014/08/hedging-market-with-vix-vxx-uvxy-vix-futures/ might give you some ideas.

    — Vance

  • thecritic

    hi Vance, are UVXY euro or american? thanks

  • UVXY options have American style exercise. However, since there’s no dividends there really isn’t any significant risk of early exercise.

    — Vance

  • thecritic

    am pretty wary of american options… how about vix straight up then? better choice in your opinion?

  • VIX options are not options on VIX, they are effectively options on VIX Futures. Decay rates for VIX options may be better than VXX/UVXY options, but decay is very rapid the last few days before expiration. For more see http://sixfigureinvesting.com/2010/01/trading-vix-options/

  • Nikhil Goyal

    if i had VXX call options with a strike of 38.00 and the closing price was 38.95 – I would get $0.95 per option at settlement ? huge bid ask spread and if I were to sell only $0.70 was being offered. I have never help options post expiration for settlement but in this situation isn’t it better to just hold of for cash settlement than sell at a much lower bid price ? ( also is the settlement price the 4:00 pm price or the after market close price ) thanks a ton for your help in advance.

  • Hi Nikhil, Unlike VIX options, VXX options are NOT cash settled. If you let an in-the-money call expire they will be automatically exercised by your broker. You have just bought 100 shares of VXX per option at the strike price. Probably not what you want. By the way, using limit orders you can usually do significantly better than the official offer / bid. I usually start at the mid-price and start sweetening it by a nickel in the market maker’s favor until I get a fill.

  • Nikhil Goyal

    Thanks very much, Vance! If the mid point between the bid ask is much lower than the difference between price and strike wouldn’t it be better to just get them exercised and get the difference between price and strike? for near in the money options i do see that difference (price minus strike vs the bid ask mid points) is sometimes big in % terms very close to expiration.

    Sorry about asking off the thread topic question here but what brokerage would you suggest for trading low cent options. I want to buy 1,2 cent options sometimes but the eTrade brokerage charges 75 cents so it’s 75% one way commission if the option expires or 150% two ways if i can save anything . I found eoptions on the internet – they charge 15 cents but really very bad review. Any suggestions, much appreciated. thanks a ton for your kind help.