VIX options

The VIX is the CBOE Volatility Index, derived from the prices of near-term S&P 500 index options. It expresses the market's expectation of S&P 500 volatility over the coming 30 days, quoted in annualized percentage points. Because volatility tends to spike during market declines, the VIX has an inverse relationship with the S&P 500 and is often called the market's fear index.

VIX options trade on that index. Like other index options, they are cash-settled — there is no deliverable underlying — and they settle European style, meaning they may be exercised only at expiration, though they can be traded out of at any time. Settlement is based on a special opening quotation calculated at expiration, and each contract carries a multiplier of $100. An investor holding a VIX 20 call who sees settlement at 28 receives (28 − 20) × $100, or $800, per contract.

The practical use is hedging. An investor holding a broadly diversified equity portfolio faces systematic risk that diversification cannot remove. Buying VIX calls creates a position that gains value precisely when the market falls sharply and volatility spikes, offsetting some of the portfolio loss. Selling VIX calls or buying VIX puts, by contrast, is a bet that volatility will stay low or decline. One nuance worth knowing: VIX options are priced off VIX futures rather than the spot index, so they do not track the current VIX level one-for-one.

On the Series 7, VIX options appear within non-equity options alongside index and currency options, with an emphasis on identifying that a long VIX call is a bearish-market hedge and that settlement is in cash. The Series 9 covers the same product in more depth as part of options supervision, including suitability considerations for recommending volatility products to customers.