Noob VIX Futures Options Questions

[MidwesternTrader]

Just looking to confirm the basics here, not in depth stuff like alpha, theta decay, etc. Let me know if I misinterpret anything below.

CBOE VIX futures options are European style, cash settled instruments meaning they can only be exercised on the expiration date for the cash equivalent settlement. The options themselves can be bought or sold anytime like any other option before expiration.

They use a $100 multiplier.

If today I bought one Jan. 17, 2018 15.00 Call for .15, that will cost me $15.00.

If on Jan. 17, 2018 the final settlement price is determined to be 17.00, then the exercised cash settlement value I will receive is $200.

Open interest on the Jan. 17, 2018 40.00 Calls is 109,557. People sold those calls as an income generating strategy betting the settlement price will be below 40.00 on the expiration date.

If I sell 100 Jan. 17, 2018 40.00 Calls for .05, I receive $500. If the settlement price on Jan. 17 is below 40.00, those calls expire worthless. If the settlement price on Jan 17 is 41.00, my calls will be exercised and I will pay out the cash settlement difference of $10,000.

Thanks in advance.

 

[Robert Morse]

Open interest on the Jan. 17, 2018 40.00 Calls is 109,557. People sold those calls as an income generating strategy betting the settlement price will be below 40.00 on the expiration date.

You don't know that. The trade could be part of a spread. the trade couls have been inictaed by the buyer and sold by a market maker, or the reverse.

If I sell 100 Jan. 17, 2018 40.00 Calls for .05, I receive $500. If the settlement price on Jan. 17 is below 40.00, those calls expire worthless. If the settlement price on Jan 17 is 41.00, my calls will be exercised and I will pay out the cash settlement difference of $10,000.

The math is correct.

 

[El OchoCinco]

If I sell 100 Jan. 17, 2018 40.00 Calls for .05, I receive $500. If the settlement price on Jan. 17 is below 40.00, those calls expire worthless. If the settlement price on Jan 17 is 41.00, my calls will be exercised and I will pay out the cash settlement difference of $10,000.

Thanks in advance.

Just to add some reality for better understanding, the JAN 17, 2018 40.00 Calls have no BID so you will not be able to sell those at all as they only have an ask of $0.05 due to being so far our of the money.

 

[i960]

You might already know this but the most important thing to know about VIX options is that they aren't options on the index at all but options on each VIX future. For all intents and purposes they are VX option rather than VIX options. However with that, the trading schedule is that of the VIX index rather than the futures and they trade on CBOE rather than CFE.

If you're thinking of selling calls on VIX, please don't. Not at these levels (and I don't care how "free money" it looks).

 

[MidwesternTrader]

Just to add some reality for better understanding, the JAN 17, 2018 40.00 Calls have no BID so you will not be able to sell those at all as they only have an ask of $0.05 due to being so far our of the money.

That makes sense. Not thinking about selling those, just laying an an example to be sure I understand the basic mechanics around these.

 

[tommcginnis]

Since you believe they're cheap, how many do you own?

So how many times *have* you played/lost at Russian Roulette??

 

[MidwesternTrader]

You might already know this but the most important thing to know about VIX options is that they aren't options on the index at all but options on each VIX future. For all intents and purposes they are VX option rather than VIX options. However with that, the trading schedule is that of the VIX index rather than the futures and they trade on CBOE rather than CFE.

If you're thinking of selling calls on VIX, please don't. Not at these levels (and I don't care how "free money" it looks).

No, wouldn't sell the calls. Just weighing leveraged approaches to try and be in the right place, right time if this magic, market melt up ever gets hit in the face with a brick. Like a rapid 10 % correction or some geopolitical event that comes out of nowhere to unnerve everyone. I need something simple I can understand to quickly exit a volatility spike scenario, but trick is you need to be in the position before anything real happens. Always a catch to making free money.

The margin requirements on the VIX futures are so steep, I think the combined overnight initial and overnight maintenance requirements for a long position is higher than the thing is even worth. Your long VIX could go to zero and it wouldn't trigger a margin call. Sorta defeats the purpose of a leveraged futures instrument. I really don't think the VIX could realistically ever really drop below 9.00 anyway.

 

[tommcginnis]

I need something simple I can understand to quickly exit a volatility spike scenario, but trick is you need to be in the position before anything real happens. Always a catch to making free money.

The catch is, there was no Free Money in the first place.
But you don't learn that until you try to pick up the shattered pieces of your trade, *and*possibly* your account, in the aftermath of what you just wrote you expect to come.

Think about buying a VIX butterfly: your debit will cap your loss. (Loss*es*.)
If the Black Swan swims into view, and vol skyrockets, have your hand on the Sell button as things go past. But don't expect this to work. Don't put real money on it. Ech. Bleh.

 

[El OchoCinco]

No, wouldn't sell the calls. Just weighing leveraged approaches to try and be in the right place, right time if this magic, market melt up ever gets hit in the face with a brick. Like a rapid 10 % correction or some geopolitical event that comes out of nowhere to unnerve everyone. I need something simple I can understand to quickly exit a volatility spike scenario, but trick is you need to be in the position before anything real happens. Always a catch to making free money.

The margin requirements on the VIX futures are so steep, I think the combined overnight initial and overnight maintenance requirements for a long position is higher than the thing is even worth. Your long VIX could go to zero and it wouldn't trigger a margin call. Sorta defeats the purpose of a leveraged futures instrument. I really don't think the VIX could realistically ever really drop below 9.00 anyway.

Depending on your broker, the overnight margin on VX futures can be high and it can jump and spike with no notice depending on the nature of your positions (outright long or short or a spread/FLY). Similarly selling naked calls would have open ended margin possibilities (I know you were just picking an example for hypotehtical undersanding of the mechanics).

There are some that buy OTM Calls for insurance against a VX spike or market major dump but it becomes one of those bleed every month premium waiting for the major move unless you look at it like insurance and are fine paying the premium. No easy answer unfortunately. If you have a basket of futures and they all can be highly correlated against you in a market crash then one hedge is to ensure your basket is not 6 longs of underlyings that present such a risk. Not a direct answer but a reduction of correlation risk if you feel it is warranted.

 

[MidwesternTrader]

OK, another hypothetical position opening the crowd can pull apart for me.

So long as we are in the subdued volatility trend with the VIX continuing to compress lower, is this a trade that can be opened?

When the VIX Index is under 10, on Friday purchase VX future calls at 15.00 strike for the option expiring 2 Wednesdays in the future. In this case the JAN 24 15.00 call. Assume if these calls have traded today for .25, would they trade Friday at .20 IF the VIX is relatively at the same level?

Cost of position for 10 calls: 10 *.20 * 100 = $200
Cost of commission & fees to open position: 1.34 * 10 = $13.40
Total Cost to Open Position = $213.40

Big Assumption: If this super low volatility trend continues through all of 2018, and as a pure hypotheical the VIX reads 10 or lower half the time every Friday then put this trade on 26 times.

Total cost to put this trade on 26 times: 26 * $213.40 = $5,548.40.

If a single Black Swan hits or a single volatile correction event occurs AND the VX future tracked by a owned group of calls finishes at 25.00 on the Wednesday expiration/settlement date, that would provide the following funds to the 15.0 Call position owner:

10 * 100 * (25.0 - 15.0) = $10,000

So if one puts this position on 26 times and it hits once, the profit is $10,000 - $5,548 = $4,452.

Outside of the single volatile event never occurring to get the VX Future to end at or above 25.00 EXACTLY on the required expiration/settlement Wednesday, is there something else in my hypothetical that is not going to fly?

Thanks in advance.