VIX Covered Calls?

[sle]

Quote from nazzdack:

1) Instead of VIX futures, you could trade the VIX (ETF) exchange traded fund as your underlying giving you a potentially infinite time horizon and the ability to continually write call options against that position....until you get called/exercised.

VXX is an excess return index ETF, so as you go along you will be bleeding the rolls (i.e. paying for risk premium). The whole excess return thing makes understanding options on VXX (which are now trading) a bit more difficult too.

Quote from rockthecasbah12:

1. Do VIX options close to the VIX cash value, or the VIX futures value?

Cash settled. You could have googled that.

VXX only rose 4.54% today when the VIX rose 12.30%. [/QUOTE]

VIX is a calculated index based on front expiry, while VXX rolls VIX futures. By it's nature, the futures will be less volatile then spot and going to react to the movement in spot in root-time manner.

 

[nazzdack]

Quote from rockthecasbah12:
1. Do VIX options close to the VIX cash value, or the VIX futures value?

The daily settlement is to the futures price, not the cash value. The calls may seem "rich" and the puts may seem "cheap" otherwise.

 

[MTE]

Quote from rockthecasbah12:

I think by explaining my initial thought, you'll see better what my intent was with this trade, although I'm pretty sure there is no clear cut way to capitalize on it without being able to directly trade the VIX cash value.

You can sell the VIX Jan 2011 $10.00 call for $13.70. At today's close of the cash value, that is about $3.00 worth of premium. As long as the VIX cash value doesn't fall below $10, you keep the premium and your shares get called.

It seems though that there is no way to really accomplish this trade that is worth the risk.

Jan VIX options are priced off of the Jan VIX futures, which are @ 24.10, not spot VIX so that $3 premium over spot you mention is completely irrelevant.

In other words, the "opportunity" you see is just you not understanding the pricing of VIX options.

 

[sle]

Quote from MTE:

In other words, the "opportunity" you see is just you not understanding the pricing of VIX options.

Well, thats a big question - "is term structure roll (which undoubtedly happends) an opportunity or not?". Conventional wisdom is that if term structuure roll is bigger then theta (or in terminal terms max(0, Strike - Spot) > Premium), you want 'em puts.

 

[nazzdack]

Quote from sle:
----term structure roll....
----an opportunity or not?....
----Conventional wisdom....
----theta....
----you'd want puts.

?...in a carrying-charge market, you'd want to be "short". In an inverted-market, you'd want to be "long"?

 

[sle]

Quote from nazzdack:

?...in a carrying-charge market, you'd want to be "short". In an inverted-market, you'd want to be "long"?

Not sure what you mean by "carrying-charge". Here is an example:
(a) spot VIX is 18.91
(b) Mar VIX futures is 25.91
(c) Your rolldown to spot is 7 points.
(d) VIX 25/20 put is costs about 2 points
You buy the put spread. If nothing happends, it will roll down to spot and you have a pretty strong expectation for it to do so (7 pts) so you gonna make 5 points on your put spread. If the world blows up, you lose your premium (this said, blowup in vol of vol will protect you some).

 

[nazzdack]

Quote from sle:
----what you mean by "carrying-charge".
----Here is an example....
----VIX 25/20...buy the put spread.

1) The March is priced higher than the spot, a "carrying charge" market, in the traditional sense.
2) Your put-debit spread is a "short" position. You're hoping for decline and convergence DOWN to the spot.

 

[sle]

Quote from nazzdack:

1) The March is priced higher than the spot, a "carrying charge" market, in the traditional sense.
2) Your put-debit spread is a "short" position. You're hoping for decline and convergence DOWN to the spot.

So we are talking about the same thing, yes. I just was not familiar with the term "carrying charge" but now that I think about it, it makes sense (cash + carry).
Now, you can always do these guys for free by doing 1x2 or 1x3 - it might get painful though.

 

[Jerkstore]

Quote from rockthecasbah12:

If I were able to actually buy the VIX, the January $10 call would give me the most downside protection.

The VIX could go up any mount, and I keep my premium, and the VIX could go down almost $10 before I lose any money.

You do realize this is the same as selling a put, right? The difference is that you will be charged significantly more in capital and interest charges--not to mention paying a wider, less liquid bid/ask spread-- to hold futures (or especially stock) against an itm call option, rather than just selling the put.

Also, why even try to do a covered call in the VIX? Try doing a covered call in the etf instead. The etf options function a lot more like stock options. If you plan to sell an ITM call and buy stock, save yourself the trouble and just sell the put.