Trading VIX options has become very, very popular among professional and retail traders alike. In just the VIX options (not VXX, not UVXY, etc.) they trade almost 625,000 options per day! But, especially if you are not well versed in the various features of the VIX and the VIX options you are setting yourself up to “bring a knife to a gun fight” to quote Sean Connery in the Untouchables. There are some things that are pretty well known like the expiration date for the options being different than that for regular equity options. They expire typically the Wednesday before the equity options. They are European style meaning that you cannot exercise the options before expiration. One thing that is quite different than what determines the expiration value. With a typical equity option determining the settlement price of the underlying is easy, it’s the settlement price of the equity. Not so straightforward for VIX options. Let’s take a look at a position I put on today in VIX. VIX was trading approximately 13.35 when I put on the following signal:
Sell (opening) the VIX May 4th WE 14.5 strike put
Buy (opening) the VIX May 4th WE 13.5 strike put
For a CREDIT of $0.50 or more.
This signal is not GTC and is valid with VIX trading $13.25 or higher.
Why would I sell an in the money put spread? Because you cannot look at where the VIX is to determine what the underlying price is. Remember, VIX options settlement value is determined by the associated VIX FUTURE not where the VIX index is. So, you must look to the May 5th VIX future to determine this. The VIX future for May 4th settled today at 14.825. So, you can plainly see why this is in fact a out of the money put spread sold for $0.50 which means we are laying even odds that May 4th VIX futures will settle above 14.50 at the day of expiration to retain our entire credit.