What happens when VIX futures expire?
VIX expiration and settlement
If a trader has not offset or rolled his position prior to contract expiration, the contract will expire and the trader will go to settlement. At this point, a trader with a short position will be obligated to deliver the underlying asset under the terms of the original contract.
If you don't act, the contract will reach its natural conclusion, through either cash settlement or physical delivery, depending on the contract's terms. If it's a cash-settled contract, the settlement will be calculated based on the market prices at expiration and credited or debited to your account.
The VIX Index settlement process is patterned after the process used to settle A.M.-settled S&P 500 Index options. The final settlement value for Volatility Derivatives is determined on the morning of their expiration date (usually a Wednesday) through a Special Opening Quotation ("SOQ") of the VIX Index.
Like a regular equity option, the premium is the maximum gain for a short call. If the VIX stays below 50, the option is “out of the money” and will expire worthless, allowing the investor to keep the $400 option premium as their overall profit.
Here's a general breakdown: Buyers of Options: For buyers of options (either calls or puts), the risk is generally limited to the amount of the premium paid for the option. If the market doesn't move in the direction you anticipated, the option may expire worthless, resulting in a total loss of the premium paid.
In the case of options contracts, you are not bound to fulfil the contract. As such, if the contract is not acted upon within the expiry date, it simply expires. The premium that you paid to buy the option is forfeited by the seller. You don't have to pay anything else.
Unlike shares of stock, which in theory can be held forever, futures contracts expire in a specified month. Commodity futures based on grain or crude oil offer the potential for "physical delivery," where the buyer takes possession of the commodity (and the seller must deliver the commodity).
Can we sell futures contract before expiry? Yes, among the many unique features of a futures contract, it allows you to trade (sell) a futures contract before expiry. In fact, most traders enter the market as speculators to profit from futures trading, exit their position before expiry.
No expiration date: As mentioned earlier, one of the primary features of perpetual futures is the lack of an expiration date. This allows traders to keep their positions open indefinitely, without the need to close or roll over the contract.
How not to lose money on futures trading?
Futures trading (like all trading) involves a certain degree of risk, so it is important to protect yourself. There are a few ways to do this, such as using sell or buy stops to limit your losses to a comfortable level, or by using hedging strategies like buying puts.
VIX options settle in cash and trade in the European style. European style limits the exercise of the option until its expiration. The trader may always sell an existing long position or purchase an equivalent option to close a short position before expiration.
According to the rule of 16, if the VIX is trading at 16, then the SPX is estimated to see average daily moves up or down of 1% (because 16/16 = 1). If the VIX is at 24, the daily moves might be around 1.5%, and at 32, the rule of 16 says the SPX might see 2% daily moves.
VIX options are European style, so they can be exercised only at expiration. Keep in mind that holding VIX options through expiration can be tricky. VIX standard options officially expire on the Wednesday 30 days (or closest to 30 days) prior to the third Friday of the next calendar month.
It also cannot move to zero and historically has not gone below nine, which is distinct from equity prices. VIX futures and options should not be used as long-term, buy-and-hold investments.
As a rule of thumb, VIX values greater than 30 are generally linked to large volatility resulting from increased uncertainty, risk, and investors' fear. VIX values below 20 generally correspond to stable, stress-free periods in the markets.
VXX is an exchange-traded note (ETN) based on VIX futures. Because these futures need to be rolled to keep VXX alive, this ETN experiences profound time decay via 'contango'. VXX vastly underperforms the VIX for this reason. VIX is an index composed of S&P 500 options so does not, therefore, experience contango.
Futures traders tend to do inadequate research.
Most traders overtrade without doing enough research. They take too many positions with too little information. They do a lot of day-trading for which they are undermargined; thus, they are unable to accept small losses.
You don't have to have the margin in place to buy options on a futures contract, and your loss is limited to the premium no matter what direction the underlying moves. When selling options on a futures contract, your maximum loss is unlimited, while your maximum profit is limited to the premium.
If you do not sell an index option on expiry, if it is OTM, then it will expire worthless and if it is ITM, the system will automatically suqare off the position and you will get the premim realized from sale in your account. Index options are cash settled in India still.
What happens if no one buys your option?
If there are no buyers for your options call, you will not be able to sell the option and you will be left holding the position. The value of the option will be affected by a wide range of factors, including market conditions, the performance of the underlying asset, and changes in interest rates.
In other words, at expiration, in-the-money options are exchanged for shares in the underlying security (equity or ETF). SPY ETF options expire into a long or short position in the ETF product. Index options, like SPX and Mini-SPX, are cash settled.
Future contracts have numerous advantages and disadvantages. The most prevalent benefits include simple pricing, high liquidity, and risk hedging. The primary disadvantages are having no influence over future events, price swings, and the possibility of asset price declines as the expiration date approaches.
Market Risk: The most obvious risk with futures trading is that prices can be highly volatile, and changes are can be swift, adverse, and devastating. 11 This is because the market risk is magnified by leverage, when there's already enough to worry about when supply and demand shift.
A futures contract's value is typically its contract size multiplied by the current price. For example, if gold futures are trading at $1,900 an ounce, one futures contract representing 100 troy ounces would be valued at $190,000 ($1,900 x 100 = $190,000).
