VIX options

T

tomatotrader

I am trying to get a better understanding about options.
For example i will buy 1000$ VIX call in the money strike price 11.00 for 7.30 for a june contr and a friend buys 1000$ call out of the money strike price 15.00 for 4.30 for a june contr.If the underline price reach 18.00 in 30 days how i know who have the advantage?
 
If you look at the greek exposure of the two positions, you will see that they are very different.
One is more levered and stands to make a higher % gain in a move to 18. This leverage is not an advantage.

But during a period of low volatility, gamma exposure may be cheaper to buy at the OTM strikes minus commissions. So, your friend may have a slight cost advantage for running the higher risk of his calls expiring worthless.
 
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There are tools you can use to model the price of those options vs underlining 30 days from now. However, I find typically those tools do not account for changes in IV properly. For example, they typically give you way to increase or decrease IV the same amount for both positions... but in reality, the IV changes in those 2 options are going to be very different.

Generally, if your just asking who will have the higher return on the $1,000 invested, the friend wins. He will have more money in his account if VIX hits 18 in 30 days than you will if you bought the 11 strike. But, if your wrong in your assessment and the VIX doesn't hit 18 in 30 days and instead volatility stays low, your friend is also going to lose more money.
 
First of all... they are both ITM, since the June options contract is actually priced of the June VIX future... which is currently at 18-ish. That's why your 11 call is 7.30 (7 intrinsic and 0.30 time premium) and your mate's 4.30 (3 intrinsic and 1.30 time value). A good reminder to find the ATM strike, is that the ATM call = ATM put... and in your case, the 11 put would be roughly 0.30 and the 15 put 1.30... so the calls are worth more, hence they are In The Money.

Same mistake made here https://www.elitetrader.com/et/threads/buying-vix-calls-here.305372/page-6#post-4388355

Second.. if you are new to options, don't start with options on VIX... since that's like trading a derivative on a derivative of a derivative... You will need a thorough understanding of how VIX is calculated and how the VIX futures are calculated and how they generally move... (remember, you're actually trading options which are priced on the futures, not the index!!!)

Third, it's about leverage. $1000 gives your mate 1.7x the number of calls compared to you. So your mate's total value will move by 1.7x yours when underlying moves....
 
tomatotrader said:
I am trying to get a better understanding about options.
For example i will buy 1000$ VIX call in the money strike price 11.00 for 7.30 for a june contr and a friend buys 1000$ call out of the money strike price 15.00 for 4.30 for a june contr.If the underline price reach 18.00 in 30 days how i know who have the advantage?
More...

Just a bit of advice, if you are looking to get a better understanding of options, then VIX options are not the right vehicle. Try something softer.
 
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