How 96% of October VIX Calls Expired Worthless

A cautionary tale in trading options based on CBOE Volatility Index (VIX) futures

by Adam Warner

Published on Oct 22, 2015 at 10:00 AM

Remember all those CBOE Volatility Index (VIX) calls that have traded these last two months? You know, all the fortunes made owning them and all the worries that trapped VIX shorts would be the doom of us all? Well, yesterday was the expiration of monthly VIX options and… funny story:

If only those traders had a DeLorean to transport them into the future so they could have seen the VIX close. 

Setting that aside, it is kind of shocking to see how these VIX calls ended up. These October contracts never got to the 40 that spot VIX actually saw, but October futures did see low-to-mid-20s. And the volatility of volatility exploded, so somebody paid up pretty massively for ultimately worthless paper. And many, many more paid low dollars for cheap calls that eventually produced nothing. 

But of course, this sort of analysis isn't entirely fair. It speaks nothing of what a VIX call owner might have done with the calls while he/she owned them. Were they used to buy stock into dips? The gamma was huge as VIX shot up, so owners maybe sold actual VIX futures. 

Who knows? It all kind of highlights the nature of this whole VIX complex. The last thing in the world you want to do is buy and hold anything, if for no other reason than on Day Zero you might get caught in an open like this:

VIX settlement 1022

That would be the long red line on the left. VIX gapped way down on the open, even though the market lift itself was rather tepid. And VIX option and futures holders got cash settled at that 14.91 price Schaeffer's Senior VP of Research Todd Salamone mentions above, meaning they saw nothing of the ensuing VIX rally. 

This sort of thing happens virtually every VIX expiration. By that I mean there's almost always "unusual" orders in every out-of-the-money S&P 500 Index (SPX) put on the board, and an odd settlement price. If you leave a position on into the morning run-off, you're at the mercy of this run-off, as you can't trade the position. 

Of course, you could have had the right position on, too. It's a crapshoot, and there's really no economic reason to expose yourself to it. 

Longer term, buying and holding didn't work out well, either. October VIX paper did give you ammo to trade, as I mentioned above, but it ended up losing anyway, and October futures were rarely if ever this low at any point in their trading life. All a VIX future gives you is a bet on a snapshot of VIX on some future date -- a date that will see a manufactured settlement in VIX. They're fantastic to trade, but always remember: that's exactly what they're for. 

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

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