Noob VIX Futures Options Questions

[El OchoCinco]

1. Any trade can be opened
2. You are assuming the 15.00 strike call will always cost $0.20 which is a major assumption
3. What if VX jumps around prior to settlement but never ends at 25.00 on that specific day.
4. What if VIX spike to 25 but front VX stays below 25
5. Do you think it is viable to buy VIX Calls every few weeks and wait for the 1 major spike and that profit is worth a whole year of investment?

 

[MidwesternTrader]

1. Any trade can be opened
2. You are assuming the 15.00 strike call will always cost $0.20 which is a major assumption

Agree on 1 and 2.

3. What if VX jumps around prior to settlement but never ends at 25.00 on that specific day.

Guess I should have stated settled at 25.00 or higher will make $10,000 or more. Doesn't need to be exactly on 25.00. If the settle is 23.00, then the calls are cash settled for $8,000, etc.

1
4. What if VIX spike to 25 but front VX stays below 25

I think this is a large risk. Seems when a volatility events occurs, the VIX index ends the day significantly higher than the VX futures. VX futures long holders sell off at the end of day to lock in long profits from the event.

5. Do you think it is viable to buy VIX Calls every few weeks and wait for the 1 major spike and that profit is worth a whole year of investment?

Not sure about this as well. But its like a sorta diversification play on $5,000 in the portfolio if it can be run in a year. Although its an all or nothing play, which isn't preferable for sure.

 

[El OchoCinco]

I think the intent of looking at this is as a hedge of a long portfolio against a vol spike/market crash. If that is the case then you put on the trade as an insurance. You don't have to do this weekly. You can buy long term calls or quarterly as well. I think your suggestion is more actively trading the hedge.

 

[TrustyJules]

@Ocho - you should beware of attempting to buy calls in the VIX as a hedge. Volatility spikes if there is a major downturn of course but you will find the market becomes illiquid/ prices will not be good for ITM calls. The options are European after all and the MM knows that even in a major down turn volatility will stabilise. You will therefore not be able to get out of the position at the time that you want to or (alternatively) for the price you hope for.

Its alleged by some that selling puts on the VIX would then make more sense as a hedge - with current very low VIX this might be viable. The theoretical minimum for the VIX is somewhere around 9, so selling an out of the money put will get you a hedge - of course what with VIX pricing it will appreciate as you head towards expiry in case the VIX stays low. However it is alleged that in case it spikes the puts will lose their value more rapidly and be more liquid. I have no actual experience of this and it would violate put call parity but this could happen during spikes I suppose.

 

[bikertrader]

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.

Oh u are damn right

 

[beerntrading]

Just a few observations here...if the VIX spikes, even if it gets as high as 25, you will not be able to get out at this price (i.e. You will not get $10 of intrinsic value...You'd be lucky to pick up $2 or 3 in "intrinsic" value unless it's this week's expiry). Read up on this point with CME, because they will never be accurately modeled by options calculators designed for stocks or indices (VIX notwithstanding)...the sole exception to this is settlement, which brings me to:

These are settled on a special opening quotation (SOQ) which can spike unexpectedly above any value that ticks throughout the rest of the day. You can find this settlement price with the symbol VRO. I actually had a ratio spread do this to me last month to spectacular effect (Here is where that happened--it's got a few resources to look at: https://www.elitetrader.com/et/threads/vix-special-opening-quotation.315112/ ).

And I'm not sure how experienced you are, but I'd recommend placing your closing order and let it rest. Otherwise you'll end up trying to pick up more gains than you should have just taken when your hedge fired off.

 

[MidwesternTrader]

Just a few observations here...if the VIX spikes, even if it gets as high as 25, you will not be able to get out at this price (i.e. You will not get $10 of intrinsic value...You'd be lucky to pick up $2 or 3 in "intrinsic" value unless it's this week's expiry). Read up on this point with CME, because they will never be accurately modeled by options calculators designed for stocks or indices (VIX notwithstanding)...the sole exception to this is settlement, which brings me to:
.

Yes, for this to hit with any big value it has to expire at the high number. Not going to catch a big intrinsic value as you point out as anyone that sold the calls is likely to only buy back at low intrinsic betting the underlying VIX future will fall sharply before the expiry. Even the expiry date final number is tricky as it seems to get manipulated too. Thanks for the VRO symbol tip, i didn't know that.

The only certainty is buy the calls as cheap as possible to have any chance of getting something out this for a weekly, suppressed VIX play.

 

[beerntrading]

as anyone that sold the calls is likely to only buy back at low intrinsic betting the underlying VIX future will fall sharply before the expiry.

Well, yes and no. Yes you're going to pay higher spreads as a function of risk, but that's not it. The VIX is liquid enough that you're not going to be over a barrel under normal volatility circumstances. But, you're up against the VIX future, and while stock options are priced based on the spot market value of the socks, the future has (is?, shows?...what's the syntax here?) contango (the future price approaches the "spot" price asymptote as it approaches expiry...in this case declines towards the actual VIX, and the option is priced based on the presumed value at expiry). This is what I was getting at. When I've traded it, I'm looking specifically to hedge with the move that comes with a VIX of 22--but in practice, when you're in the 15-ish days to 1 month time frame from expiry, getting a sell based on a "spot" price of 14-16 is my mark.

 

[MidwesternTrader]

Follow up. I executed this trading idea on Friday five minutes before close. I put a .15 bid on the VIX JAN 24 14.50 to purchase 10 calls and got a fill. Total cost of position with commission $160.00.

But will need a big chain of events for the VRO to close above 14.50 on 7:00AM Wednesday to execute a positive expiry for the trade. Some outside events needed to help kick off a major selloff on Tuesday.

• USA Government shut down impasse continuing would help
  
• Another outside economic or political news event occurring over the weekend or early Monday
  
• Markets moving moderately / strongly lower on Monday
• Followed by a larger profit taking sell off on Tuesday
• Then final the Wednesday 7AM VRO number settling higher than 14.5 to force a payout on the calls

 

[beerntrading]

But will need a big chain of events for the VRO to close above 14.50 on 7:00AM Wednesday to execute a positive expiry for the trade. Some outside events needed to help kick off a major selloff on Tuesday.

• USA Government shut down impasse continuing would help
  
• Another outside economic or political news event occurring over the weekend or early Monday
  
• Markets moving moderately / strongly lower on Monday
• Followed by a larger profit taking sell off on Tuesday
• Then final the Wednesday 7AM VRO number settling higher than 14.5 to force a payout on the calls

I had the same reasons for opening a VIX ratio spread (Jan 30) myself yesterday. Mine will pay off if we hit 14-15 next week, or above 11.25 on expiry. That said, I have some outstanding obligations should we close just under 11 that could get quite pricey.

Also, you might want to consider resting sell orders on part of your position. That will stop you from missing a quick volatility spike (and keep you exposed with the remaining position to higher moves). The VIX has a way of coming down just as quickly as it went up. Most of my Ratio Spread position will be closed to pay the maximum possible loss on the remaining position. That way, I profit unless it closes at higher strike. And if something big happens that's going to hit the market the next day, I lift the order until the open, and put it back in at a more reasonable price shortly after opening.