DEFINITION of 'VIX Option'

A type of non-equity option that uses the CBOE Volatility Index as the underlying asset. This is the first exchange-traded option that gives individual investors the ability to trade market volatility. Trading VIX options can be a useful tool for investors wanting to hedge their portfolios against sudden market declines, as well as to speculate on future moves in volatility.

BREAKING DOWN 'VIX Option'

A trader who believes that market volatility will increase now has the ability to profit on this outlook by purchasing VIX call options. Sharp increases in volatility generally coincide with a falling market, so this type of option can be used as a natural hedge rather than using index options. For advanced option traders, it is possible to incorporate many different advanced strategies - such as bull call spreads, butterfly spreads, etc. - by using VIX options.

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RELATED FAQS
  1. What is the CBOE Volatility Index? (VIX)

    Find out why investors and analysts use the Chicago Board Options Exchange Volatility Index, or VIX, to measure the market's ... Read Answer >>
  2. What are the most effective hedging strategies to reduce market risk?

    Learn about different hedging strategies to reduce portfolio volatility and risk, including diversification, index options ... Read Answer >>
  3. How does implied volatility impact the pricing of options?

    Learn about two specific volatility types associated with options and how implied volatility can impact the pricing of options. Read Answer >>
  4. What is the relationship between implied volatility and the volatility skew?

    Learn what the relationship is between implied volatility and the volatility skew, and see how implied volatility impacts ... Read Answer >>
  5. What is index option trading and how does it work?

    Learn about stock index options, including differences between single stock options and index options, and understand different ... Read Answer >>
  6. Do options make more sense during bull or bear markets?

    Understand how options may be used in both bullish and bearish markets, and learn the basics of options pricing and certain ... Read Answer >>
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