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Why VIX Options Can Fall When Spot VIX Drops

Article Quant Q&A · Author: blah_crusader
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Summary

The discussion explains why out-of-the-money VIX puts expiring on a given date can lose value even when the spot VIX falls sharply. The key distinction is that VIX options are tied to the VIX futures contract for their expiration, not directly to the spot VIX. The cited market example says spot VIX declined, while the relevant April futures rose, which can move put values against their holders.

A second possible factor is a decline in the options’ implied volatility, which can reduce premium enough to outweigh a favorable move in the underlying. To investigate, compare the option’s value with its matching futures price and implied volatility over time. The thread offers possible explanations rather than a full attribution; it does not provide an option-pricing analysis or establish how much each factor contributed.

Key ideas

  • VIX options are priced against the VIX futures contract matching their expiration, not spot VIX.
  • A decline in spot VIX does not imply a decline in the relevant VIX future.
  • Lower implied volatility can reduce an option’s value despite a favorable underlying move.
  • Investigate option price changes alongside the matching futures price and implied volatility.

Tags

OptionsFuturesVolatilityDerivatives pricing
Full text
# VIX OTM put options decrease value after sharp decrease of underlying


# VIX OTM put options decrease value after sharp decrease of underlying












I was wondering about disentangling an effect I saw on the market yesterday. I saw nearly all OTM VIX put options with maturity date 15/04/2020 decrease in value while at the same time the VIX took a sharp downfall. What would you give as possible reasons given current market conditions? And, how would you investigate such effects to understand it?

## Answer by nbbo2 (score 6)

https://quant.stackexchange.com/a/51466

Yes, the VIX took a sharp downfall on 2020/03/02, from 40.11 to 33.42 (-6.69).

But that is not what the 2020/04/15 Put options are based on, they are based on the 2020/04/15 VIX Futures (VIJ20), these went from 23.025 on 2020/02/28 to 23.325 on 2020/03/02 an increase of 0.3.

The Vix options are based on the futures, not the spot Vix value.

## Answer by roz (score 1)

https://quant.stackexchange.com/a/51464

Maybe implied vol on the VIX fell. An option can lose value even if the underlying goes in its direction if implied volatility falls enough to outweigh the directional effect.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.