VIX options and expiration
Hello, everyone, and welcome back to the world of VIX options. Last week I got on this subject again after reading an excellent post in the Daily Options Report. One aspect of VIX options I've always meant to explore in this blog is their expiration. VIX options are tricky and unique in several ways, as I've explained here before, and their expiration is also a bit different.
Wednesday, not Friday
VIX options expiration usually falls on a Wednesday, in contrast with "standard" options that usually expire on a Friday. Why? Let's start with a little backstory, explained very well in this quote from the CBOE's site:
"VIX was designed to be a consistent, 30-day benchmark of expected market volatility, as measured by SPX option prices. Of course, there is only one day in the life of any option that is exactly 30 days to expiration, so in order to arrive at the 30-day standard, VIX is calculated as a weighted average of options expiring on two different dates."
That's a little dense, so let's break that thought down. In a nutshell, the previous paragraph means that there's only one day of the month in which the VIX option is truly a 30-day option. On this day, the implied volatility (IV) of that one 30-day SPX option makes up the entire value of the VIX. I guess the inventors of the VIX options thought this would be the perfect day to settle the VIX options, so they made that magic day the day the settlement value is determined. As it happens, that day usually falls on a Wednesday; technically speaking, it's the day that is exactly 30 days prior to the third Friday of the following calendar month. (Note that the third Friday of the calendar month is usually expiration day for "standard" options.) Sometimes the VIX Wednesday falls just before the "normal" expiration Friday, and sometimes it's just afterward.
The VIX settles "European-style", so the last day to trade the contract in the marketplace is the day before the settlement value is determined, usually a Tuesday. The actual settlement value is then determined at the Wednesday open.
Here's another tricky detail about the VIX: to look up its settlement value you use the symbol VRO, not VIX. Strange, I know, but it's useful to keep in mind. To save confusion, I've gathered all the settlement dates for the VIX in 2008 in this table. Just keep in mind that the final day of trading these options is the day before.
2008 Expiration Dates for the VIX
(Last trading day is the day BEFORE these dates)
January 16, 2008
February 19, 2008
March 19, 2008
April 16, 2008
May 21, 2008
June 18, 2008
July 16, 2008
August 20, 2008
September 17, 2008
October 22, 2008
November 19, 2008
December 17, 2008
I realize all this can be confusing, so feel free to send your questions on the VIX or its options my way.
While implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or probability of reaching a specific price point there is no guarantee that this forecast will be correct.
Any strategies discussed or securities mentioned, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell securities.