Why VIX Traders Must Follow Futures

02/11/2013 7:00 am EST


Marty Kearney

Senior Staff Instructor, The Options Institute, CBOE

The Option Institute's Marty Kearney reviews some of the sometimes-missed facts about trading VIX options, which is one of the most liquid option contracts.

I’m here with Marty Kearney and one of the interesting things about trading the VIX, Marty, is that when trading the VIX, you don’t necessarily express your opinions about the VIX through the VIX itself. 

Right.  The VIX is a very interesting product and for years, Rob, we’ve had people, as I travel around with the Options Institute, the educational arm of the CBOE, people say, well, can I trade volatility rather than just trade particular stock or trade a particular option volatility within a certain stock.  Now you can trade volatility and the VIX options trade may trade a bunch.  There are days when the VIX options are our busiest product at the CBOE, which is surprising.  Now it’s more of an institutional product and one of the problems that I have when I talk to investors at shows such as this is that people are used to looking at the VIX.  Okay, so we’ve been training you for 20 years to look at the VIX

Everybody looks at the VIX but if you want to trade an option on the VIX, you can’t look at the VIX.  You have to look at the VIX’s future for that month.  Now I was just looking up some prices for something I’m doing a little later today, looking at a two-month VIX option and a three-month VIX option.  It’s a call option slightly out of the money.  The three-month option is a dime less than the two-month option.  Now people in our world that are used to time spreads, something further out is always worth more, but that’s not necessarily the case with VIX options so you have to find the VIX futures.  It’s available at CBOE.com.  You can click up at CFE.  If you don’t have a futures feed, you can get it, CBOE.com, CFE up in the upper right-hand corner, they give you the next seven or eight months going out but the VIX is a very interesting product and we’re seeing institutional people use it.  For example, one of the strategies is that as stocks go down, volatility usually goes up doesn’t it?

Okay, and what we’ve seen is people that have a portfolio, more institutional, that would like to hedge that portfolio rather than buy puts in something like SPX or SPY. Why don’t we buy calls or futures on the VIX.

On the volatility itself.

On the volatility itself and we’ve seen days where it’s at our website, CBOE, that on days where the market goes down 2%, the VIX has an average of jumping like 10 or 12. 

Right, it’s a much bigger bank for your buck.

Absolutely but it’s a short-term vehicle, for the most part, even though we go out many months and investors can certainly trade it but I just caution them that it’s a very unique situation.  It’s European style, which is wonderful.  Isn’t that expiration Friday, it’s the first product we have that isn’t an expiration Friday, so go to CBOE.com and look up the VIX if you’re thinking of doing something with it.

That’s just innovative strategies for using the VIX.  Thanks, Marty.

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