Quantitative Finance Stack Exchange is a question and answer site for finance professionals and academics. It's 100% free, no registration required.

Sign up
Here's how it works:
  1. Anybody can ask a question
  2. Anybody can answer
  3. The best answers are voted up and rise to the top

Could someone tell me a common method for pricing VIX Options please?

Do I need to use a Stochastic Vol Model? Or Local Vol Model is suitable as well?

Should the model be modelling S&P 500 and then recalculate the VIX Index? Or model the VIX Index directly?


share|improve this question
Do you understand exactly how the VIX index is derived? – Matt Wolf Nov 6 '13 at 14:34
Market makers commonly just treat these as "normal" options that happen to have an unusual skew. This is a roundabout way of asking: what will your hypothetical pricing method be used for? – Brian B Nov 6 '13 at 16:19

I am ignorant to VIX option pricing but I would start with this: The performance of VIX option pricing models: Empirical evidence beyond simulation -- Working paper version

share|improve this answer

There's ongoing debate about whether SPX and VIX options contain different valuable information (see Bardgett Gourier Leippold (2013) - Inferring Volatility Dynamics and Risk Premia from the S&P 500 and VIX Markets among recently contributions). I would say this is slightly counterintuitive (VIX index is calculated as a portfolio of SPX vanilla), but at the same time, is the fact that VIX derivatives provide a pure volatility exposure (and traders know it much better than me) that make them conveying a different information, at least concerning volatility dynamics. This said, I would use a consistent model calibrated on both markets. Moreover, in the context of VIX options, there's no Dupire equation (linking VIX option Prices to a VIX implied local volatiliy), but - in some sense parallel - there's an approach called the standalone approach (see Mencìa Sentana (2012) for an update reference), in which one models directly the VIX (without care of the S&P500 market). I would use this If you need a pure pricing machine. But, a structural model as the one I mentioned before is needed to have a perspective of the market as a whole (e.g. estimate risk premia). To conclude, you could off course even simply interpolate the VIX implied surface as is common practice in SPX context. But I don't think this what you meant.

share|improve this answer

Your Answer


By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.