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VIX options

Cash-settled options whose underlying is a VIX futures contract, not spot VIX; the single biggest source of confusion in volatility trading.

A vix option does not price off the index you see quoted. It prices off the volatility-futures contract expiring at the same time, because that future is what a dealer can actually hedge with. Spot VIX is a calculation, not a tradable asset.

This is why a VIX call can barely move on a day when spot VIX jumps. If the spike is expected to fade, the relevant future may hardly budge, and the option follows the future.

Example: spot VIX rises from 14 to 18, up 29%. The relevant future rises from 17.5 to 18.5, up 6%. A $20 call that you bought expecting the 29% move gains only what a 6% underlying move justifies. Always quote the future before quoting the option.

Related: vix, volatility-futures, vix-futures-curve, vvix

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Payoff of a long call at expiryA flat loss equal to the premium below the strike, turning upward at 45 degrees above it.Profit / loss per share08595115125Strike 105Max loss 3 — the premium paidBreakeven 108Profit keeps growingUnderlying price at expiry
Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.

Educational only, not advice. Spotted an error? Post in Site Feedback.