Long Call

The VIX Strategy Workshop is a collection of discussion pieces designed to assist individuals in learning how options work and in understanding VIX options strategies. These discussions and materials are for educational purposes only and are not intended to provide investment advice.

Investment decisions should not be made based upon worksheet outcomes.

Access to, or delivery of a copy of, the Options Disclosure Document must accompany this worksheet.

Long Call

If a trader forecasts a rise in expected market volatility, then buying a VIX® call option might be an appropriate strategy. Any option trade involves, at minimum, a two-part forecast. The first part is the direction of the underlying instrument, and the second part is a forecast for the time period of the expected price move. When trading VIX options, there may be third piece to the puzzle. Since VIX options are priced using the same assumptions as the corresponding VIX futures contracts, it is often helpful to check the price level of that corresponding VIX futures contract.

Consider the following example:

Assume that the VIX index is currently 16.50 and a trader forecasts that December VIX index settlement to be approximately 20.00. Based on this forecast, it might seem reasonable to buy a December VIX call. Before making a trade, however, consider the current prices of December VIX calls as shown in the table below, given December VIX futures at 16.50:

 

Bid

Ask

VIX Dec 10 Call

6.40

6.80

VIX Dec 15 Call

2.70

2.90

VIX Dec 16 Call

2.30

2.40

VIX Dec 17 Call

1.80

1.90

VIX Dec 18 Call

1.45

1.55

VIX Dec 19 Call

1.15

1.25

VIX Dec 20 Call

0.95

1.00

Given the prices in the table, it appears that several of the December VIX calls are good potential purchases. If the VIX index settles at 20 at December expiration as forecast, then the VIX calls with strike prices 10 and 18 would result in a profit if the VIX index is at 20.00 at December expiration. For example, the VIX Dec 17 Call purchased at 1.90 (the ask price in the table) would rise to 3.00 with the VIX index at 20.00 at December expiration. However, the full cost of the call plus commissions is at risk of being lost if the forecast is not correct.

Consider the same outlook with different option prices:

Again, assume the VIX index is 16.50 and a trader expects the December VIX index settlement to be approximately 20.00. Based on this outlook, we again look at current prices of December VIX calls, given December VIX futures at 19.50:

 

Bid

Ask

VIX Dec 10 Call

9.30

9.70

VIX Dec 15 Call

4.90

5.20

VIX Dec 16 Call

4.30

4.60

VIX Dec 17 Call

3.70

3.90

VIX Dec 18 Call

3.10

3.30

VIX Dec 19 Call

2.65

2.75

VIX Dec 20 Call

2.25

2.35

 

In this second example, the call prices seem prohibitively expensive. The December 18 Call, for example, if purchased at 3.30, would result in a loss if the VIX index settled at 20.00 at December expiration. With the VIX index at 20.00 at December expiration, the December 18 call would settle at 3.00 for a loss of 0.30, not including commissions. It would still be possible for trader to benefit from a forecast of the VIX index settling at 20.00 in December, but purchasing a call may not be the optimal strategy given the prices in the second table.