Today is the third Wednesday of the month, which might not mean anything for most investors out there, just a regular day at the office.  For myself though since I am a volatility and derivatives investor it is a day that carries slightly more meaning.  So why is today special?

It’s VIX Options settlement day

 

This has no effect on any of our Volatility Trading Strategies.  This is only a point of interest for people who directly trade VIX options.  I personally do and I know that some of our community does as well which is why I’m explaining this today.

Option trading on the VIX index closes the third Tuesday of every month, but the settlement process takes place using Wednesday opening prices through what’s called the VIX Special Opening Quotation  (SOQ)  so technically VIX options settle the third Wednesday of every month.

What is the VIX Special Opening Quotation?

I don’t want to bore you with the details so I will show you the official description from the CBOE, but below that I’ll just give a basic explanation which is much easier than it sounds:

 

From the CBOE:  VIX options and futures are based on the CBOE Volatility Index, a measure of 30-day expected volatility of the S&P 500 Index. The final settlement value for VIX futures and options is a Special Opening Quotation (SOQ) of the VIX Index calculated using opening prices of constituent SPX or SPX Weekly options that expire 30 days after the relevant VIX expiration date.

CBOE link:  http://www.cboe.com/data/historical-options-data/index-settlement-values

That is a rather wordy way of saying, the final settlement value is determined at the market open on Wednesday using forward S&P 500 option values.

 

Why does this matter?
The VIX index is cash settled, and all gains and losses at monthly expiration for VIX options are determined using that settlement value so for anybody who has trades left open to expire, that settlement value is very important.

 

–  Yesterday  (Tuesday)  the VIX index closed at 10.03

–  Today  (Wednesday)  the official VRO settlement was 8.75

 

For my VIX options trade this month, my maximum profit was at a VIX of 10 and it tapers off on either side of that.  Thankfully I loaded the boat on some 9.50 VIX puts as a hedge so I’ll still be profitable, but this month is a perfect example of just how frustrating the VIX options settlement process can be.

Sometimes just when you think you’ve got a great end to the monthly cycle, some crazy VIX settlement voodoo takes place and ruins your day.  It’s not uncommon at all to see the settlement value deviate substantially from Tuesday’s close.  Sometimes it can be costly, while other times it can improve things.

In the end it really is just a lottery and VIX options traders have no control over this nail biting process.  If trades are left open Tuesday, they are at the whim of the Special Opening Quotation voodoo.

 

All VIX Options  (VRO)  settlement values since 2006:

* The VRO for December 2017 absolutely smashed the previous record low set this past September.  I suspect that will be something I can tell my future kids one day.

 

We’ll all gather around the campfire in 40 years and I’ll tell the story of when the VIX options VRO settled at 8.75!

 

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