What is VIX Option?
365 reads · Last updated: December 5, 2024
A VIX option is a non-equity index option that uses the Cboe Volatility Index as its underlying asset.
Definition
VIX options are non-equity index options with the Chicago Board Options Exchange's Volatility Index (VIX) as their underlying asset. Often referred to as the 'fear index,' the VIX measures the market's expectation of stock market volatility over the next 30 days. VIX options allow investors to trade on market volatility rather than specific stocks or indices.
Origin
The VIX index was initially introduced by the Chicago Board Options Exchange (CBOE) in 1993 to provide a standardized measure of market volatility. In 2004, CBOE launched options based on the VIX index, enabling investors to directly trade market volatility.
Categories and Features
VIX options are primarily divided into call options and put options. Call options allow the holder to buy the VIX at a specific price upon expiration, while put options allow the holder to sell the VIX at a specific price upon expiration. A notable feature of VIX options is their non-linear relationship with the underlying asset (VIX index), which makes their price behavior different from traditional stock options. VIX options are often used to hedge against market volatility risk or to speculate on market volatility.
Case Studies
During the 2008 financial crisis, the VIX index soared to historical highs, and many investors profited by holding VIX call options as market expectations for future volatility surged. Another example is the early 2020 COVID-19 pandemic period, where the VIX index rose sharply again, and investors used VIX options to hedge against volatility risks in their portfolios.
Common Issues
Common issues investors face when using VIX options include misunderstandings of their pricing mechanisms and overlooking their non-linear relationship with the underlying asset. Additionally, the time value and volatility premium of VIX options can lead to short-term losses for investors.
