Describe the VIX option

The VIX option is a derivative security derived from the Chicago Board Options Exchange (CBOE) Volatility Index (VIX). It is an index that measures market sentiment and volatility based on the prices of various S&P 500 options. It has become increasingly popular among investors as it offers excellent potential for finding opportunities in rising and falling markets. The VIX option exposes traders to expected future price movements in the underlying asset without owning it. In Singapore, the VIX option is traded on the SGX Derivatives Market.

How to trade the VIX option

Now that you know the VIX option, you need to learn how to trade it. For successful VIX options trading, traders must understand the trading mechanics, market conditions, and the nature of volatility. It will help traders manage their risks and take advantage of opportunities.

Learn about volatility

Before trading the VIX option, traders should understand volatility and its impact on a security’s price movement. Volatility is the amount of fluctuation in a security’s price over time, indicating how much risk is associated with owning it. Generally, higher volatility means a more significant potential to find lucrative opportunities but also tremendous potential for losses. Knowing how to interpret and use volatility data can give traders an edge when trading the VIX option.

Choose an options brokerage platform

Traders must select an appropriate brokerage platform that offers access to VIX options trading in Singapore. Traders should look for a platform that provides reliable market data, research tools, and educational resources. It is also essential to choose a platform with low commissions and fees to control trading costs. Moreover, traders should pick a platform that provides access to VIX options in the currency they want to trade, such as Singapore dollars.

Set up a risk management plan

Before trading the VIX option, setting up a risk management plan to protect your capital is essential. It involves determining your risk tolerance levels and setting appropriate stop-loss orders. It is essential to be aware of the potential risks associated with the underlying asset’s volatility and other factors, such as liquidity and margin requirements. Furthermore, traders should practice sound money management and create a trading plan that outlines their goals, objectives, and strategies.

Monitor the market

VIX options are susceptible to market conditions and news releases. Traders should pay attention to macroeconomic events such as interest rate decisions from central banks, employment data, and geopolitical developments. Traders can use this information to identify opportunities for lucrative trades, especially when options trading online. Moreover, traders should use technical analysis, such as chart patterns and indicators, to anticipate price movements in the underlying asset and set entry/exit points accordingly.

Place orders

Once traders have identified an opportunity and set up a risk management plan, they can place orders to buy or sell VIX options. Traders must be mindful of the expiration date, as these options are only valid for a limited period. After placing their orders, traders must monitor them closely and adjust their positions if necessary. Moreover, traders should use stop-loss orders to limit the potential for losses if the market moves against them.

VIX option trading risks

Though VIX options offer the potential to take advantage of rising and falling markets, trading these options comes with risks. Traders should know about these risks to ensure they do not incur heavy losses.

Volatility risk

Volatility risk occurs when the underlying asset’s price moves unexpectedly. It can lead to losses as options will lose value faster than expected if there is a sudden and significant movement in the asset’s price.

Leverage risk

When trading options, traders must be aware of the leverage associated with them. As options are leveraged instruments, even small movements in the underlying asset’s price can result in large trades or losses for option holders.

Time decay

Options have a limited lifespan, and their value decreases over time as they approach expiration. Therefore, traders need to be aware of this phenomenon known as ‘time decay’ and consider it when trading options.

Liquidity risk

Trading options in thinly traded markets can lead to liquidity risk. It occurs when there is a lack of buyers or sellers in the market, making it difficult for traders to enter and exit positions at desirable prices.