New Weekly VIX Options Are Great For Volatility Traders

| July 24, 2015 | 0 Comments

option tradersNew Weekly VIX Options Are Great For Volatility Traders

As volatility becomes a more popular metric for investors to watch, so does trading volatility products.  The VIX itself is tradable through futures and options.  VIX options are heavily traded by large institutions as an alternative to S&P 500 options.

As a reminder, the VIX (S&P 500 Volatility Index) is a measure of implied volatility levels on S&P 500 options.  The VIX is often called the ‘fear gauge’ for investors.  Broad market volatility is most commonly tracked by watching the VIX.

If you’re interested in learning more about the VIX, the CBOE VIX mini-site has a ton of valuable information on the index.  Follow the link if you want to learn more.

Retail investors tend to gravitate more towards volatility ETF products.  They’re usually cheaper to trade and can be easier to access.  The most popular of these ETFs is the iPath S&P 500 Short-Term Futures ETN (VXX).

I’m not going to get into the pros and cons of trading VIX (options) versus VXX or some other volatility ETF.  Each product can be a reasonable way to trade volatility.  And, they all have faults.  It’s best to trade whatever you’re most comfortable with.

For those of you with a deeper interest in options volatility, I’ve often written in the past about volatility and options trading.  Feel free to check out this article to learn more about why volatility is important.

With the increasing trading volume of the VIX and comparable volatility products, exchanges and ETF companies are frequently adding new products to the mix.  Some of these new products have fallen flat, while others have generated a good amount of volume.

Not too long ago, the CBOE, home of the VIX, attempted to create short-term volatility products based around the VXST, a 9-day volatility measure.  (That’s opposed to VIX, which is a 30-day measure of volatility expectations.)  These products did not attract the interest from traders that was expected.  As such, the exchange is doing away with VXST.

However, the CBOE is instead listing weekly VIX options, starting this summer.  Trading weekly options should fill the void left by halting the VXST, while also providing a product traders are familiar with.  Early returns suggest these options will be extremely popular.

Okay, so why trade weekly options on the VIX?

Here’s the chart of the VIX:

large trade in VIX options, a chart of VIX

As you can see, the VIX can be quite volatile and choppy.  30-day volatility doesn’t always correspond to how quickly volatility is moving in actuality.  In fact, volatility often moves a substantial amount on a daily basis.

Weekly VIX options can help traders trade volatility events more accurately.  It could be particularly useful for economic releases and other major news events.  Moreover, since these weekly options expire on Wednesdays, they could be used to trade volatility around employment reports (typical Friday release).

So, are VIX weekly options likely to be popular?

I believe the new weekly options will do extremely well.  Weekly S&P 500 options already make up about a third of overall SPX options traded.  VIX weekly products should do even better.

It may take a while to figure out the best strategies for trading weekly VIX options.  However, you can bet it will only be a positive for traders to have more choices for tracking and trading volatility.

Yours in Profit,

Gordon Lewis

Note: Gordon Lewis has been trading options for more than 15 years and he now writes and edits for Optionstradingresearch.com.  You can sign up for the newsletter and get a free research report. We are your go-to source for top notch options trading research.

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Category: Options Volatility Watch

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.

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