Options Contracts on the CBOE Volatility Index® (the VIX® Index) - Introduction
VIX® volatility index options were introduced in 2006. Their acceptance as a method of trading an opinion on expected market volatility has been tremendous. The chart below illustrates the rapid growth in the open interest of VIX® option contracts.
One reason for the increase in popularity of VIX options is their ease of use in hedging equity portfolios. Given the historical inverse relationship between the direction of the S&P 500 Stock Index (SPX) and the VIX index, VIX call options can be purchased as a hedge against a declining stock market. Quite simply, when the market drops, the VIX index often rallies; and the percentage rise in VIX index is frequently much larger than the percentage decline in SPX. This pricing relationship has made VIX options potentially useful tools for hedging against a forecast move in the overall stock market.