If you trade March options you have to look at the March Vix Futures. That's the underlying... not the VIX. Eventually the March Futures will move towards the VIX index level... but that will take untill the exact expiry.
VIX index is based on the 30 day IV's of the SPX options... since it's a measure of the 30 day variance.
March Vix futures are based on the forward vols of the period between March and April. Only at expiry of the March futures, the VIX index and the March futures are based on the same SPX implied volatilities.... which are the IV's of the SPX April options (30 days till expiry).
Usually the front month of the SPX options are lower than back months... this causes the downward roll in the futures. Feb < March < April... High real volatility means the SPX options are bought, causing IV's to rise... but mostly in front month options. So contango turns into backwardation for the first few months. VIX index rises most... the futures less... the further out, the less they rise. So your June future hardly did anything compared to the front months, since it was already higher due to contango... and turning to backwardation caused the Feb futures to rise significantly... March less.. April even less etc.
This usual contango situation also means that the VIX options further out have fairly high prices of (OTM) calls... because the ATM is actually quite a bit higher than the spot VIX is.
A March 45 call might eventually be helpfull... but even if VIX is now at 30 or 35, the March future wouldn't be much higher than 25-28. It will creep up if the spot VIX stays high... but meanwhile you're paying a decent theta on those options, since the IV of VIX options are significant. Usually it's about 80-100... now it's 180. That makes it expensive... you're daily loss due to theta is quite high.
Looking at the March 45 call, it went from 0.15 to 1.00+... but collapsed again to 0.45 now. And most of that gain is because the IV of those options went up from 100 to 180... if that normalizes it's pretty much a useless call option. Too far out, too expensive. It might work for you if we get something like another GFC.. but this small crash the last few days wouldn't give you the decent hedge you would need to cover almost a total loss in those ETN's.
To cover your 200k loss in the ETN, you would need at least 20k worth of those calls at 15 cents a week ago. Which means you'll lose on your strategy of making 15k in the ETN.
Thanks a ton JackRab! I'm still thinking through your very informative post. But let me ask a simple question. Let's I have bought a VIX 40 call for the very nearest expiration date (I think one was today, so let's say Feb. 14th, which I think is the next one). VIX goes through the roof tomorrow. So, let's talk about movement above 40. Granted, it won't move quite as much as my UVXY or TVIX short (even assuming I've bought an appropriate # to cover the underlying amount), since the maturity is a week or so out. But shouldn't it be *pretty close*, since it is (i) very close in time, and (ii) for people trying to cover, it is probably one of the best things they can buy to cover?
So, let's play out the two scenarios. One is the VIX spikes literally to like 100 or 200 for a day, then drops back real fast. So tomorrow it spikes to 200, all is lost in UVXY and TVIX theoretically speaking, but wouldn't the very temporary spike in my call (assuming I've bought the right #) cover it in large part? Or shouldn't it? So I'm for a split second, or for a day or two, down like a billion percent on my UVXY short, but I'm up like *almost a billion percent* on my call? Those are both undone the next second or minute or hour when VIX drops back down to say 35 (and I've lost my call premium if it stays there, as well as the loss from whatever the VIX was previously before the rise as compared to 35, theoretically x2).
The other scenario is that the VIX spikes to 200, and stays there for an extended period of time before dropping. So, it spikes to 200, my UVXY short is crushed, but offset at least in large part by the very-near call, and February 14th rolls around, and I collect the difference between 200 and 40. I could then leisurely wait for the UVXY to slowly retreat over time no? Of course, it could always spike FURTHER I suppose, which unless I purchased another option would lead to ruin.
Thoughts? Part of the whole key in this is the pricing of these options - when looking at them today it looked profitable, but you are saying its not, so I will have to look at them again tomorrow!
Thanks so much!
