\tVIX options are European-style contracts – meaning they can only be exercised on option expiration day. This eliminates any possible “arbitrage” effect (the act of buying an option, exercising it immediately, and then selling the underlying security for a profit). So VIX options will often trade at a discount to intrinsic value.<\/p>\n
\tFor example, on Friday, the VIX closed at 10.13. At that level, the VIX September 6 $10.50 puts are intrinsically worth $0.37. But they were offered at only $0.10. That's a $0.27 discount to their intrinsic value.<\/p>\n
\tIf it existed on a regular, American-style stock option, you could buy the put, exercise it, and liquidate the position all day long, picking up $27 for every contract you traded. The European-style feature prevents that from happening – because you can only exercise the contract on the September 6 option expiration day.<\/p>\n
\tBecause of this unique pricing structure, VIX options provide terrific clues about where most traders expect the VIX to be on option expiration day.<\/p>\n
\tThe current VIX option prices tell us that even traders who are making bearish bets on the VIX expect the index to move higher over the next two days.<\/p>\n
\tThis sentiment is even more evident if you go out a little further and compare the VIX September 20 $10.50 calls to the VIX September 20 $10.50 puts. The calls closed Friday offered at $2.20, while the puts were only $0.05. (I use my trading quote system to track these prices, but you can find them at FreeRealTime.com<\/a>.)<\/p>\n \tVIX calls are trading for 44 times the price of the equivalent VIX put options.<\/p>\n \tVIX option traders clearly expect the index to move higher at some point over the next two weeks. And a rising VIX (rising volatility) usually accompanies a falling stock market.<\/p>\n \tSo if you're making short-term bullish bets, be careful as we head into September.<\/p>\n \tBest regards and good trading,<\/p>\n
![](\"https:\/\/casey-assets.s3.amazonaws.com\/images\/misc\/jeff-clark-signature.png\")
<\/div>\n