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Trading VIX Derivatives: Trading and Hedging Strategies Using VIX Futures, Options, and Exchange-Traded Notes by Russell Rhoads

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Chapter 5

Weekly Options on CBOE Volatility Index Futures

During the summer of 2010, the CBOE introduced weekly options on stocks and exchange-traded funds, which quickly caught on among traders and investors. The evidence of this acceptance was dramatic volume and open interest levels for weekly options just a few weeks after they were introduced. Although the CBOE had been trading index options with weekly expirations for some time, strong interest in these options was realized after they were available on stocks and ETFs. Due to the success of stock and ETF weekly options, the exchange decided to develop weekly options on the VIX.

Weekly options on indexes, stocks, and exchange-traded funds settle in the exact same manner as their standard expiration counterparts. The only difference is that the expiration may not occur on the third Saturday following the third Friday of the month. In fact, the official expiration date for weekly options is the Friday they cease trading. Due to the unique nature of the VIX index, the exchange decided to take a different route for shorter-term VIX options.

Instead of just creating a VIX option that was based on the weekly closing price of the VIX index or an AM settlement product based on the opening prices of S&P 500 index options, the exchange took a different approach. This approach involves options that settle in positions in the underlying VIX futures contracts. In fact, the VIX weekly options actually are futures options that trade on ...

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