Help me understand VIX futures (and options) please

S

Saltynuts

I could be wrong, but when I've always thought about options, when you purchase one call let's say, it was a right to purchase 100 shares at the strike price. How does this work with VIX? I know VIX are cash settled, but that is not my question. I note on this site that the VIX option "multiplier" is listed as $100:

http://www.cboe.com/products/vix-in...ons-and-futures/vix-options/vix-options-specs

So does that mean if I buy one call I am buying the right to buy the equivalent of $100 worth of the VIX at the specified price, or instead that I am buying the right to essentially buy 100 shares of VIX at the specified price (again, cash settled).

Same question for VIX futures. I see here they are listed as having a $1,000 multiplier:

https://cfe.cboe.com/cfe-products/vx-cboe-volatility-index-vix-futures/contract-specifications

So let's look at the 3/21/18 contract here:

http://www.cboe.com/delayedquote/futures-quotes

It's currently quoted at 16.67. So let's say I sell one contract. Is that me agreeing to sell (again, cash settled) the equivalent of 1,000 VIX shares at 16.67 on 3/21/18, or $1,000 worth of VIX shares? If the latter, is the worth determined on 3/21/18? Or today?

On this front, let's say I sold the above contract for $16.67. VIX today is at ~$9.80. Theoretically, if there was a "VIX" share, could I not sell the future, but however many underlying VIX shares are needed to fill the futures contract in full (which depends on my above questions ha), and lock in a ~70% profit in less that a year's period? I must be thinking about it wrong, that just seems too easy.


Thanks! And sorry for the newbish questions!
 
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Futures: Strictly at settlement, the value is $1000 x *SOQ level of the VIX index. In play, $1000 x the price of the specified futures contract. Thus, if the August future is trading at 11.55 and you buy or sell 1 contract, you are long or short a notional value of 11.55 x $1000, i.e. $11,500-worth of the expected forward VIX (its value at expiry of that futures contract).

Meanwhile, the minimum price tick is .05, i.e. $50. Thus, a price move of 1.00 in the future will affect your P&L by $1000.

Options: Similarly, with a multiplier of $100, at settlement the value is $100 x *SOQ level of the VIX index. In play, if the price (aka premium) of the specific option (e.g. Aug 11.5 call) is 0.85, one options contract has a notional value of ($100 x 0.85) $850-worth of the forward VIX. Options minimum price move is usually $5.

Note that although they ultimately settle to the spot VIX, in play the options are essentially priced off the relevant futures contract, i.e. consider the underlying for VIX August options as the monthly August VIX futures contract.

*SOQ = Special Opening Quotation. The method of deciding the final VIX cash settlement value for calculating gains/losses of the expiring future and options contracts. Be aware.

Other Qs answered in the quote below:

Saltynuts said:
It's currently quoted at 16.67. So let's say I sell one contract. Is that me agreeing to sell (again, cash settled) the equivalent of 1,000 VIX shares at 16.67 on 3/21/18, or $1,000 worth of VIX shares? If the latter, is the worth determined on 3/21/18? Or today?

Effectively the former ($1000*16.67), and value finally determined at the opening on March 21st '18. However, the last day you can trade the contracts will be the prior day.

On this front, let's say I sold the above contract for $16.67. VIX today is at ~$9.80. Theoretically, if there was a "VIX" share, could I not sell the future, but however many underlying VIX shares are needed to fill the futures contract in full (which depends on my above questions ha), and lock in a ~70% profit in less that a year's period? I must be thinking about it wrong, that just seems too easy.

Indeed, spot ("cash") VIX can't be traded in practice, so there's no cash and carry arbitrage. That March price is incorporating a term (time) risk premium. For much of the time, as it moves closer to expiry it will 'roll down' towards the VIX spot price.
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Thanks so much dunleggin, I really appreciate it! I'll need to read it through a few times to fully understand it haha. :) Thanks!
 
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