VIX Option
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 underlying asset being the Chicago Board Options Exchange (CBOE) Volatility Index (VIX). The VIX is widely regarded as a measure of market volatility and is often referred to as the “fear index.” VIX options allow investors to trade on market volatility rather than specific stocks or other assets.
Origin: The VIX index was first introduced by the CBOE in 1993 to provide a measure of market-expected volatility. In 2006, the CBOE launched options based on the VIX index, enabling investors to directly trade market volatility.
Categories and Characteristics: VIX options are primarily divided into call options and put options.
- Call Options: Allow the holder to buy the VIX index at a specific price on or before the expiration date.
- Put Options: Allow the holder to sell the VIX index at a specific price on or before the expiration date.
- Non-linear Returns: Due to the inherent volatility of the VIX index, the return curve of VIX options is typically non-linear.
- High Sensitivity: VIX options are highly sensitive to changes in market sentiment and expected volatility.
Specific Cases:
- Case One: Suppose an investor expects a significant increase in future market volatility. They can buy VIX call options. If market volatility indeed increases and the VIX index rises, the investor can profit.
- Case Two: Another investor believes that current market volatility is overestimated and expects it to decrease. They can buy VIX put options. If market volatility decreases and the VIX index falls, the investor can also profit.
Common Questions:
- How do VIX options differ from stock options? The underlying asset of VIX options is market volatility, not specific stocks or indices.
- How is the value of VIX options assessed? The value of VIX options primarily depends on the market's expectations of future volatility rather than the current market price.
