Volatility Trading Glossary

A

At-the-Money (ATM)

Options with strike price equal to current underlying price. ATM options have maximum time value.

Annualized Volatility

Standard deviation of returns scaled to one year. VIX represents annualized 30-day implied volatility.

B

Backwardation

Market condition where near-term futures trade above longer-dated contracts. Indicates immediate hedging demand.

Beta-weighted

Portfolio positions adjusted for correlation to benchmark. Used to calculate aggregate volatility exposure.

Black-Scholes Model

Options pricing model that derives implied volatility. Foundation for VIX calculation methodology.

C

CBOE

Chicago Board Options Exchange. Creator and calculator of the VIX index.

Contango

Normal futures curve where longer-dated contracts cost more than near-term. Primary source of VIX ETF decay.

Correlation

Statistical relationship between assets. VIX typically shows -0.7 to -0.9 correlation with S&P 500.

Call Option

Right to buy underlying at strike price. VIX calls profit from volatility spikes.

D

Daily Roll

Process where VIX ETFs sell expiring futures and buy next month. Creates systematic losses in contango.

Decay

Value erosion in VIX ETFs from contango and volatility drag. Can exceed 90% annually.

Delta

Option price change per underlying move. VIX options have unique delta due to futures pricing.

E

ETF (Exchange-Traded Fund)

Securities tracking indexes traded like stocks. VIX ETFs (VXX, UVXY) track VIX futures.

ETN (Exchange-Traded Note)

Debt securities tracking indexes. Some VIX products are ETNs with credit risk.

European-style

Options exercisable only at expiration. All VIX options are European-style.

Expected Move

Implied price range from options. VIX/√12 approximates monthly S&P 500 expected move.

F

Fear Gauge

VIX nickname reflecting its tendency to spike during market fear and uncertainty.

Futures Curve

Relationship between different expiration futures prices. Shape indicates volatility expectations.

Front Month

Nearest expiration futures contract. VX1 represents front-month VIX futures.

G

Gamma

Rate of delta change. High gamma creates explosive VIX moves during market stress.

Greeks

Risk measures for options: Delta, Gamma, Theta, Vega, Rho.

H

Historical Volatility (HV)

Actual past price movement volatility. Also called realized volatility.

Hedging

Risk reduction through offsetting positions. VIX products hedge equity portfolios.

I

Implied Volatility (IV)

Market's expectation of future volatility from options prices. VIX measures 30-day S&P 500 IV.

In-the-Money (ITM)

Options with intrinsic value. Calls with strike below underlying, puts above.

Inverse ETF

Products moving opposite to underlying. SVXY provides inverse VIX futures exposure.

L

Leverage

Amplified exposure to underlying. UVXY provides 1.5x leveraged VIX futures exposure.

Long Volatility

Positions profiting from increased volatility. Includes long VIX calls, futures, ETFs.

M

Mean Reversion

Tendency to return to average. VIX exhibits strong mean reversion around 16-18.

Moneyness

Relationship between strike and underlying price. Determines intrinsic value.

N

Near-the-Money

Options with strikes close to current underlying price.

Normal Volatility

VIX between 12-20, representing typical market conditions.

O

Options Chain

List of available options by strike and expiration. VIX options chain reveals volatility expectations.

Out-of-the-Money (OTM)

Options with no intrinsic value. VIX OTM calls provide cheap crisis insurance.

P

Put Option

Right to sell at strike price. S&P 500 puts drive VIX calculation.

Put/Call Ratio

Sentiment indicator. High ratio indicates fear, low suggests complacency.

R

Realized Volatility

Actual historical price volatility. Often compared to implied volatility.

Roll Cost

Loss from selling expiring futures and buying further-dated. Primary VIX ETF headwind.

Risk Premium

Extra return for bearing volatility risk. Implied volatility typically exceeds realized.

S

SKEW

Measure of S&P 500 tail risk from options. High SKEW indicates crash concerns.

SOQ (Special Opening Quotation)

VIX options settlement value on Wednesday morning expiration.

Spot VIX

Current VIX index level. Cannot be directly traded.

SVXY

ProShares Short VIX Short-Term Futures ETF. Profits from declining volatility.

T

Term Structure

Relationship between different maturity VIX futures. Indicates volatility expectations over time.

Theta

Time decay rate. VIX options have extreme theta near expiration.

Tail Risk

Probability of extreme market moves. VIX products hedge tail events.

V

VIX (CBOE Volatility Index)

Measure of 30-day expected S&P 500 volatility from options prices.

VIXY

ProShares VIX Short-Term Futures ETF. Tracks short-term VIX futures.

VIX9D

9-day expected S&P 500 volatility. More responsive than 30-day VIX.

VIX3M

3-month expected volatility. Less volatile than standard VIX.

VIX6M

6-month expected volatility. Reflects longer-term uncertainty.

Volatility Clustering

Tendency for high/low volatility to persist. Creates trending VIX periods.

Volatility Drag

Performance erosion from daily rebalancing in leveraged products.

Volatility Risk Premium

Difference between implied and realized volatility. Source of short volatility profits.

Volatility Smile

Pattern of implied volatility across strikes. VIX options show pronounced smile.

Volatility Surface

3D representation of IV across strikes and expirations.

VVIX

VIX of VIX. Measures expected volatility of the VIX index itself.

VX Futures

VIX futures contracts. Traded on CBOE with monthly expirations.

VXX

iPath Series B S&P 500 VIX Short-Term Futures ETN. Most liquid VIX ETP.

VXN

CBOE NASDAQ Volatility Index. VIX equivalent for NASDAQ-100.

W

Weekly Options

Options expiring weekly. VIX weeklies available for short-term volatility trades.

Whipsaw

Sharp reversals causing losses on both sides. Common in volatile VIX regimes.