# Understanding VIX Options: Strategies for Hedging and Volatility

![An options trader watches for the release of the CBOE Volatility Index](https://www.investopedia.com/thmb/XpfIraJoXb_2E6RLBtQjHod8zu0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/VIXOption-f1fc8a045b974583b1337755c022dbd9.jpg)

*— Bloomberg / Getty Images*

> **Definition**
>
> A VIX option is a type of non-equity index option that uses the Cboe Volatility Index as its underlying asset.

## What Is VIX Option?

VIX options are call and put options used to trade market volatility through the Cboe Volatility Index (VIX), also known as "the fear index." VIX is an indicator of the market's expectation of 30-day volatility in the stock market. Thus, VIX call and put options enable traders to hedge against anticipated market volatility.

VIX options were the first exchange-traded options for individual investors, introduced in 2006. They are European-style options, and can only be exercised at expiration.

A VIX option is a non-equity index option that uses the [Cboe Volatility Index](https://www.investopedia.com/terms/v/vix.asp) as its [underlying asset](https://www.investopedia.com/terms/u/underlying-asset.asp).

### Key Takeaways

*   VIX options are derivatives tied to the Cboe Volatility Index, making them a tool to trade or hedge market volatility.
*   VIX call options can serve as a natural hedge against sudden market declines due to rapid increases in volatility.
*   European-style VIX options can only be exercised at expiration, although positions can be adjusted before then.
*   Traders utilize advanced strategies like bull call spreads and butterfly spreads with VIX options.
*   VIX is often called the "fear index" because it spikes during times of market uncertainty.

## How VIX Options Function in Market Strategies

Call and put VIX options are both available. Call options hedge portfolios against a sudden market decline, and put options hedge against a rapid reversal of short positions in the S&P 500 index. These options let traders and investors speculate on future volatility moves.

The VIX option, which originated in 2006, was the first [exchange-traded option](https://www.investopedia.com/terms/e/exchangetradedoption.asp) that gave individual investors the ability to trade on market volatility. Trading VIX options can be a useful tool for investors. By purchasing a VIX [call option](https://www.investopedia.com/terms/c/calloption.asp), a trader can profit from a rapid increase in volatility.

Sharp volatility increases often coincide with short-term stock price shocks. A volatility increase frequently, but not always, coincides with a downward-trending market. As such, this kind of call option is a [natural hedge](https://www.investopedia.com/terms/n/natural-hedge.asp) and can be used very strategically over longer periods, and tactically in the short term. In many cases, it can be a [more efficient hedge](https://www.investopedia.com/articles/investing/030316/4-best-hedges-drop-sp-500.asp) than equity index options.

The VIX is susceptible to a pattern of slow decline and rapid increase. VIX call options, when well-timed, can be a very effective hedge; however, VIX put options are more difficult to use effectively. The put options can be profitable for traders who correctly anticipate that a market is about to turn around from a downward trend to an upward trend.

VIX options settle in cash and trade in the [European style](https://www.investopedia.com/terms/e/europeanoption.asp). European style limits the exercise of the option until its expiration. Traders can sell existing long positions or buy equivalent options to close [short positions](https://www.investopedia.com/terms/s/short.asp) before expiration. 

For advanced options traders, it is possible to incorporate many different advanced strategies, such as [bull call spreads](https://www.investopedia.com/terms/b/bullcallspread.asp), [butterfly spreads](https://www.investopedia.com/terms/b/butterflyspread.asp), and many more, by using VIX options. However, [calendar spreads](https://www.investopedia.com/terms/c/calendarspread.asp) can be tricky because different expirations don't track as closely as equity options.

## Demystifying the VIX: The Fear Index

The Volatility Index of the [Cboe Global Markets (Cboe)](https://www.investopedia.com/terms/c/cboe.asp) trades with the symbol [VIX](https://www.investopedia.com/terms/v/vix.asp). However, the VIX is not like other traded instruments. Rather than representing the price of a commodity, interest rate, or exchange rate, the VIX shows the market's expectation of 30-day volatility in the stock market.

It is a calculated index based on the price of options on the [S&P 500](https://www.investopedia.com/terms/s/sp500.asp). The estimation of volatility for these S&P options, between the current date and the option's expiration date, forms the VIX. The Cboe combines the price of multiple options and derives an aggregate value of volatility, which the index tracks.

Introduced in 1993, the Volatility Index (VIX) was initially a weighted measure of the [implied volatility (IV)](https://www.investopedia.com/terms/i/iv.asp) of eight S&P 100 [at-the-money](https://www.investopedia.com/terms/a/atthemoney.asp) put and call options. Ten years later, in 2004, it expanded to use options based on a broader index, the S&P 500. This expansion allows for a more accurate view of investors' expectations on future market volatility. VIX values of over 30 usually indicate high volatility due to investor fear or uncertainty. Values below 15 usually signal calmer, even complacent, market times.

Because of its tendency to move significantly higher during periods of market fear and uncertainty, another name for the VIX is the "fear index."

## The Bottom Line

The Cboe Volatility Index (VIX) is an indicator of the market's expected 30-day volatility and is not a tradable commodity or asset. It is often referred to as the "fear index." VIX options are derivative securities that derive their value from the index, giving traders a way to trade market volatility. VIX call options are more effective as hedges against market declines, while VIX put options are more complex to use because of market movement patterns.

VIX options are European-style, which means that they can only be exercised at expiration; however, traders can manage their positions by selling or buying options before expiration. VIX options are best used in advanced investment strategies by experienced traders.

> **Article Sources**
>
> 1.  Cboe Global Markets. "[White Paper, Cboe Volatility Index](https://cdn.cboe.com/resources/vix/vixwhite.pdf)," Page 3.
>     
> 2.  Cboe Global Markets. "[White Paper, Cboe Volatility Index](https://cdn.cboe.com/resources/vix/vixwhite.pdf)," Page 5.
>     
> 3.  Cboe Global Markets. "[White Paper, Cboe Volatility Index](https://cdn.cboe.com/resources/vix/vixwhite.pdf)," Page 4.