VIX Option
A VIX option is an exchange-listed derivative on the CBOE Volatility Index that gives the holder the right, but not the obligation, to buy or sell VIX at a specified strike price, allowing traders to directly position on future implied volatility levels independently of equity market direction.
VIX options are listed and traded exclusively at CBOE, which also calculates and publishes the VIX index. Unlike equity options, VIX options do not deliver shares of any underlying asset upon exercise. They settle in cash against the VIX Special Opening Quotation (SOQ) calculated on the morning of the expiration date, based on the opening prices of the specific S&P 500 options used to compute the VIX for that settlement. This settlement calculation occurs on a Wednesday morning, typically the Wednesday 30 days before the next standard monthly options expiration.
VIX options are European-style: they can only be exercised at expiration, not before. This is significant because the VIX index itself — the level visible on financial terminals throughout the trading day — is not the direct underlying of VIX options. The true underlying is the forward VIX, the level at which VIX is expected to settle on expiration day, and this forward level trades at a premium to or discount from spot VIX depending on the term structure of volatility futures. A VIX option struck at 20 when spot VIX is 18 and the 30-day forward VIX is 19.5 is not as far out of the money as the spot-based calculation suggests.
This distinction between spot VIX and forward VIX is one of the most important and frequently misunderstood aspects of trading VIX options. Retail traders who buy VIX calls as a portfolio hedge expecting them to profit proportionally from a VIX spike are often surprised to find that VIX options move less than anticipated because the forward VIX they reference was already partially pricing in elevated vol before the spike occurred. The term structure of VIX futures, visible on CME platforms, provides the correct reference for evaluating VIX option moneyness.
Despite this complexity, VIX options are among the most actively traded index options in the U.S. market. Institutional hedgers use VIX calls to buy equity portfolio protection during periods of complacency, when the cost of hedging through S&P 500 puts is elevated relative to historical norms. Volatility traders structure VIX spreads — buying near-dated VIX calls while selling further-dated calls — to express views on the shape of the volatility term structure.
All VIX options are cleared through the OCC, which acts as central counterparty for all CBOE-listed options. Margin requirements for naked short VIX options are substantial given the potential for extreme VIX moves in crisis periods, a lesson reinforced during events like the February 2018 volatility spike and the March 2020 COVID-19 selloff.