VIX options

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VIX Options are financial derivatives that use the Cboe Volatility Index (VIX) as their underlying asset. These options allow traders and investors to speculate on future movements in market volatility or hedge against volatility risk in their portfolios.

History

VIX options were introduced by Cboe Global Markets in 2006, making them the first exchange-traded options that gave individual investors the ability to trade directly on market volatility. Their launch followed the introduction of VIX futures in 2004, as part of Cboe's expansion of its volatility products suite.

The development of VIX options built upon the foundation of the VIX Index itself, which was created in 1993. The original VIX Index was designed by Dr. Robert Whaley for Cboe and was initially calculated using prices of Standard & Poor's 100 Index (OEX) options. In 2003, Cboe, with input from Goldman Sachs, reformulated the VIX Index methodology to be based on the S&P 500 Index, estimating expected volatility by averaging the weighted prices of SPX puts and calls over a wide range of strike prices.

Since the end of the Financial Crisis in 2009, trading volume in VIX options has grown significantly, with an average annual growth rate of 24 percent. By 2017, combined trading in VIX futures and options reached approximately one million contracts per day.

In 2024, Cboe's VIX Index options saw record trading volumes, with average daily volumes reaching over 851,000 contracts, representing an increase of approximately 60% from 2022 levels.

Products and Services

VIX options are European-style options, meaning they can only be exercised at expiration, eliminating the risk of early assignment. They are cash-settled and provide exposure to the expected volatility of the S&P 500 Index over a 30-day period.

The primary types of VIX options include:

1. VIX Index Options: These are securities-based options that allow investors to manage or gain exposure to U.S. equity market volatility. They are AM-settled, with their settlement value determined by the Special Opening Quotation (SOQ) of the VIX on the morning of expiration.
2. Options on VIX Futures: Introduced in October 2024, these options are based on front-month VIX futures rather than directly on the VIX Index. They are regulated by the Commodity Futures Trading Commission (CFTC) and physically settle into front-month VIX futures. This structure allows more market participants, including those restricted from accessing securities-based options, to trade VIX options products.

VIX options offer several key benefits for traders and investors:

• They provide a means to hedge against market downturns, as volatility typically increases during market declines.
• Call options can be used as a natural hedge against downward price shocks in equity portfolios.
• Put options can be used to hedge against a rapid reversal of short positions on the S&P 500 index.
• They allow for more targeted volatility trading with greater granularity.
• They offer potential tax advantages with 60/40 tax treatment for certain traders.

VIX options can be used in various trading strategies, including bull call spreads and butterfly spreads, though calendar spreads can be problematic since different expiration series do not track each other as closely as their equity options counterparts.

Key People

Several key individuals have been instrumental in the development and growth of VIX options:

• Dr. Robert E. Whaley: Designed the original VIX Index for Cboe in 1993, laying the foundation for the later development of VIX options.
• Catherine Clay: As global head of derivatives at Cboe, Clay has overseen the expansion of Cboe's volatility product suite, including the launch of Options on VIX Futures in 2024.
• Rob Hocking: As head of product innovation at Cboe, Hocking has been involved in developing new volatility products, including Options on VIX Futures and Cboe S&P 500 Variance futures.