Short-Term Volatility Index ($VXST) Options Begin Trading

By Lawrence G. McMillan

As subscribers know, the CBOE created the Short-Term Volatility Index ($VXST) earlier this year.  It is a 9-day average volatility as opposed to a 30-day average volatility, which is what $VIX is.  Moreover, $VXST futures started trading about two months ago, on February 13th.

Now the CBOE has gotten the approval to trade $VXST options, beginning today April 10th, 2014.  As with $VIX options, these $VXST will be based off the $VXST futures even though at expiration they expire for cash, based on the settlement price of the index itself.

A current example might be illustrative. 

At the moment this is being written, the stock market is selling off sharply. $VXST is 16.12, +3.43 on the day.  The nearest-term futures, expiring on Wednesday April 16th, are 14.85 bid, offered at 15.05.  So, say they are trading at 14.95, the mid-point of the bid and offer.  Hence they are trading at a 1.07 discount to $VXST with just a few days remaining – significant, but not outrageous.

These prices exist:

Apr 15 call: 1.02
Apr 15 put: 0.97

By the option parity equation, you can see that these options are based off of the price of the April futures, not off of $VXST itself.

The option parity equation (assuming no dividends or interest) is:    Call – put + strike = Underlying

Substituting the option prices, we have:

Call – put + strike =
1.02 – 0.97 + 15 = 15.05

That (15.05) is the mid-price of the futures market, not the price of the index (16.12).  Hence the options are priced off the futures, not the index.

The point to be taken here is that one must be sure he is using the futures as the underlying in any calculations involving implied volatility or option greeks.  Proper calculations show the following:

                Option                           Price             Implied Vol

        Apr 13 call                            2.10                        80%

        Apr 14 call                            1.50                        118%

        Apr 15 call                            1.02                        130%

        Apr 16 call                            0.67                        135%

        Apr 17 call                            0.47                        148%

        Apr 18 call                            0.37                        163%

Only those six striking prices were listed initially, which makes it difficult to buy out-of-the-money options cheaply, as we do with $VIX options when we buy for protection (we usually buy 7 points out of the money, based on the futures prices).  I am a little disappointed that such a limited number of strikes is available, but it shouldn’t be a real problem to list more, hopefully, as demand for the product grows (which, hopefully, it will).

At this time, about 2,700 April calls have traded, 40 April puts, and no other options in the other series that extend over the next three weeks.  This is typical of the first day of trading of a new product on the CBOE.  The market makers want to show that they are capable of supporting the product. 

As for the depth of the option markets, most of the April 16^th contracts are 75-up (that is 75 are bid for and 75 are offered), with the next week 60-up, the week after that 45-up, and the last (fourth) week 30-up.

This article was originally featured in The Option Strategist Newsletter 23:07 (published on 4/11/14). Get all the articles and trading recommendations by subscribing today. Introductory 3 month trial subscriptions are available for only $29.