The Good and the Bad of VIX Weekly Options

CBOE Volatility Index (VIX) weekly options aren't perfect, but they're still a great idea

by Adam Warner

Published on Nov 4, 2015 at 10:05 AM
Updated on Jun 24, 2020 at 10:16 AM

You may or may not have noticed a new friend on your trading screens this past month: CBOE Volatility Index (VIX) weeklys! Yes, you can now trade options on VIX weekly futures, meaning you can basically play VIX in every way, in every time frame. The quotes show up on regular VIX options screens. How have they fared? Pretty well, says Matt Moran of the Chicago Board Options Exchange (CBOE):

"Average daily volume for the new VIX® Weeklys options was a strong 25,042 contracts in October, the first month of trading for the products. Prior to last month, the VIX options had expirations only once a month, but now with VIX Weeklys options there usually are VIX options expirations in at least the first four weeks."

Is that a lot? Well, it's a tough comp. As I look at the screen now, the biggest single near-money series I see actually is a weekly. Over 4,000 November 15 calls that expire in a week have traded. But in VIX, the biggest plays are in significantly out-of-the-money (OOTM) calls. Open interest in the "regular" November 20 calls is 329,000, and open interest in the "regular" November 30s is 352,000. You're just not going to get plays like that in weeklys, mainly because they are all VIX lottery tickets that don't have much likelihood of getting near the money in the very short term. They all go for very cheap dollars, so why not buy a little more time? That seems like the perpetual operating theory on the VIX board.

But having said that, VIX weeklys are a great idea. I'm always in favor of just listing everything you can on an options board. The more strikes and expirations, the merrier! The weeklys let you speculate on the VIX here and now. Always. And frankly, that's how everyone should play VIX.

OOTM VIX calls are forever wildly overpriced. VIX doesn't pop as often or in as sustained a way as financial media would have us believe. We get maybe three to five serious VIX blasts a year. Most dissipate quickly. They're difficult to time, as in you can often buy calls three months out and never see them get anywhere close.

And VIX futures don't come close to fully tracking VIX pops, as there's always an initial assumption of mean reversion. It's fun and profitable to see way OOTM calls explode exponentially in value, but it's a relatively infrequent event and, net-net, it's not a great play, in my opinion.

The plus side of weeklys is that they're going to encourage plays with better odds of success. There is a downside, though: The quotes are wider. "Regular" VIX OOTM calls are almost all 0.05 wide, bid to ask. Weeklys are more like 0.15 wide. That's a huge edge to give away ... you can make a living just trading as a market maker against order flow on a 0.15-wide quote. I'd still use the weeklys, just avoid entering market orders.

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


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