VIX options are a cash settled product that have little to no put value. Front and back month options do not have a linear mathematical relationship.

What Is VIX?

The VIX is the CBOE market volatility index, which measures the implied volatility of the S&P 500 index for a 30-day period (expressed as an annualized percentage). For example, a VIX of 15 represents an implied move of 15% in the S&P 500 over the next year.

This product is commonly referred to as the fear gauge or fear index. This is a cash settled product, meaning that at expiration no shares are called away or put to us, the options simply settle to cash. VIX option prices are derived from /VX prices. The VIX has a
non-standard expiration that expires on Wednesday, so the last day to trade it is on Tuesday.

One of the most important aspects to know about the VIX is that front and back month options do not have a linear mathematical relationship. For example, calendar spreads are non-linear, so our back month option does not necessarily cover our short front month option.

Interestingly enough, the VIX has little to no put value. For this reason, we primarily use the VIX calls to hedge against our long /VX positions. The VIX is an underlying that can explode up or down so for that reason, we never have naked VIX positions on. We also like to use certain VIX price points as a trigger for certain strategies. We believe the VIX is one of the best indicators of future market activity and we will continue to use it as one of our primary fear gauges.

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