VIX options are European-style contracts – meaning they can only be exercised on option expiration day. This eliminates any possible “arbitrage<\/strong><\/a>” effect (the act of buying an option, exercising it immediately, and then selling the underlying security for a profit).<\/p>\n So, VIX options will often trade at a discount to intrinsic value.<\/p>\n For example, yesterday, the VIX was trading near 13.50. At that level, the VIX July 19 $15 puts were intrinsically worth $1.50. But, they were offered at only $1.00. That’s a $0.50 discount to their intrinsic value.<\/p>\n If this put existed on a regular, American-style stock option, you could buy it, exercise it, and liquidate the position all day long – picking up $50 for every contract you traded.<\/p>\n But the European-style feature prevents that from happening because you can only exercise the contract on the July 19 option expiration day.<\/p>\n Because of its unique pricing structure, VIX options provide terrific clues about where most traders expect the VIX to be on option expiration day.<\/p>\n <\/p>\n Free Trading Resources<\/strong><\/p>\n Have you checked out Jeff’s free trading resources on his website? It contains a selection of special reports, training videos, and a full trading glossary to help kickstart your trading career \u2013 at zero cost to you. Just click here<\/a> to check it out.<\/p>\n<\/p><\/div>\n<\/div>\n <\/p>\n As I mentioned above, the VIX traded at 13.50 yesterday. The VIX July 19 $13.50 call options were offered at $2.00. Meanwhile, the VIX July 19 $13.50 puts were offered for $0.27.<\/p>\n In other words, traders were willing to pay more than seven times the price for a VIX call option than for a VIX put option.<\/p>\n This sentiment is just even more evident if you go out a little further and compare the VIX August 16 $13.50 calls to the VIX August 16 $13.50 puts. The calls were offered yesterday at $3.30, while the puts were only $0.30. (I use my trading quote system to track these prices, but you can find them at FreeRealTime.com<\/strong><\/a>.)<\/p>\n When VIX calls are far more expensive than the equivalent put options, it shows VIX option traders expect the index to move sharply higher over the next several weeks.<\/p>\n And a rising VIX (rising volatility) usually accompanies a falling stock market.<\/p>\n So, if you’re making short-term bullish bets, be careful.<\/p>\n The VIX “crystal ball” has a very good track record… I’m betting it’ll prove correct this time, as well.<\/p>\n Best regards and good trading,<\/p>\n Jeff Clark<\/p>\n <\/p>\n![\"Signature\"](\"https:\/\/files.jeffclarktrader.com\/global\/signatures\/jeff-clark-signature.png\")
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