John Jagerson

Predicting Volatility With the VIX, Part III

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Options

There are index options based on the VIX available to traders with a standard stock and options brokerage account.

You can buy or sell calls and puts, or create spreads, strangles or straddles like you would a traditional options trade.

However, there are a few things to keep in mind when trading VIX options:

• Because the VIX tends to revert back to the mean, at-the-money calls and puts with the same strike price may have very different premiums. For example, if the VIX is very high, it is more likely that it will begin to decline in the near term than rise further, and this will make puts much more expensive than calls. The same is true in reverse.

• VIX calls and puts expire 30 days prior to the next month's expiration of S&P 500 (SPX) index options. That means that they expire on the Wednesday before or the Wednesday after normal expiration Friday. This is not a problem for most traders, but it can be confusing if you were expecting a Friday expiration.

• Option traders investigating VIX options for the first time may find time spreads (calendar spreads, diagonal spreads, etc.) appealing at first glance. However, this is because each month's VIX options are based on a different month's SPX index options expiration date. This distorts these spreads to look much more attractive than they really are. You can dig into the details of why this is and what the risks are, but take our word for it and just don't do it.