VIX options carry unique structural differences that catch even experienced equity options traders off guard.
The Trading Cut Off
VIX options stop trading at 3:15 p.m. CT on Tuesday. Settlement is Wednesday morning. There is no ability to exit or adjust positions on settlement morning, as the market for the contracts is closed. Traders expecting to react to Wednesday's open have no recourse. Tuesday afternoon is the final opportunity to make any changes.
Settlement
The Wednesday morning SOQ is calculated from opening S&P 500 index option prices and can differ significantly from the Tuesday evening VIX close, sometimes drastically.
A position that appears in-the-money Tuesday night can settle beyond its strike by Wednesday morning. This risk is amplified by overnight macro events.
Priced off futures, not spot VIX
The spot VIX can spike several points and a VIX call can barely move, or even lose value. This occurs because VIX options are priced off the corresponding VIX futures contract, not the spot index. If the market expects a volatility spike to be short-lived, futures for that expiration do not move proportionally. Purchasing VIX calls as panic-event protection can produce disappointing results when the futures market does not reprice accordingly.
Year-end mark-to-market tax treatment
Open VIX option positions held through December 31 are treated as sold for tax purposes at fair market value, even if the intention is to hold into January. Traders who plan to wait out a position into the new year can find themselves owing taxes on unrealized gains, creating a cash flow mismatch if the position subsequently reverses.