Since the CBOE Market Volatility Index (VIX) is a statistic that tracks investors' volatility expectations for the S&P 500 Index (SPX), it can't be traded directly. While there might not be VIX shares to trade, however, you can place your bets on the volatility index with VIX options.
Essentially, VIX options aren't too different from equity options. You might buy a call to bet on a rise in the VIX, or purchase a put to play expectations for a drop in volatility. However, there are a couple of key differences that make VIX options unique.
First, VIX options are not based on the price of the spot VIX. Instead, the underlying asset is the expected value of the VIX at expiration. In other words, the value of VIX options is more closely correlated with VIX futures than the real-time VIX.
Second, VIX options expire on a different day than equity and index options. Due to the manner in which VIX is calculated, this is always the Wednesday that's 30 days prior to the third Friday of the next calendar month. Depending upon how the calendar falls, VIX options expiration might occur during the same week that regular equity options expire, or it could be the next week.
It's also worth knowing that some investors use VIX options to hedge their equity exposure. For example, since it's generally expected that the VIX and SPX will move inversely to one another, VIX calls could be used to hedge long stock positions. However, since a steady drift lower in the SPX won't necessarily translate into a major VIX spike, this type of hedge is an inexact science.
Due to their relatively complex nature, VIX options are best left to experienced speculators who are familiar with the ins and outs of the VIX index itself. If you're intrepid enough to try your hand at these sophisticated vehicles, or if you'd just like to learn more detailed information about VIX options, CBOE's website is the best place to start.
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