Strategies

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Long Put

 

Long Put

Buying a VIX® put option in anticipation of a lower VIX index is a straightforward strategy. Similar to buying a VIX call option, a forecast that justifies purchasing a VIX put should include three parts, a forecast for the VIX index, a forecast for the time period and an awareness of the price of the relevant VIX futures contract.

In this example, assume the VIX index is currently 22.00 and a trader forecasts that the VIX index will settle at 20.00 at December expiration.

With the December VIX futures trading at 25.00, a premium to the current VIX index, the quotes for December VIX put options are as follows -

 

Bid

Ask

VIX Dec 21.00 Put

1.30

1.35

VIX Dec 22.50 Put

1.85

1.95

VIX Dec 24.00 Put

2.55

2.65

VIX Dec 25.00 Put

3.00

3.20

VIX Dec 26.00 Put

3.60

3.80

VIX Dec 27.50 Put

4.60

4.80

VIX Dec 29.00 Put

5.60

5.80

VIX Dec 30.00 Put

6.40

6.60

 

All put options with a strike price of 22.50 and higher would be profitable with the VIX index at 20.00 at December expiration. For example, if we were to purchase the December VIX 25.00-strike put for 3.20, this option would be worth 5.00 based on December VIX index settlement of 20.00. The result would be a profit of 1.80.

Now consider the same outlook with a different December VIX futures price and different VIX options prices:

Again, the VIX index is currently at 22.00 and a trader forecasts that the VIX index will settle at 20.00 at December expiration.

With the December VIX future trading at 21.00, a discount to the VIX index, the quotes for December VIX put options -

 

Bid

Ask

VIX Dec 21.00 Put

2.60

2.75

VIX Dec 22.50 Put

3.40

3.60

VIX Dec 24.00 Put

4.50

4.60

VIX Dec 25.00 Put

5.20

5.40

VIX Dec 26.00 Put

6.00

6.20

VIX Dec 27.50 Put

7.20

7.40

VIX Dec 29.00 Put

8.50

8.70

VIX Dec 30.00 Put

9.40

9.60

In this case purchasing the December VIX 25.00-strike put at 5.40 would not result in a profit with the VIX index at 20.00 at December expiration. This put would be worth 5.00 points based on settlement at 20.00, which is lower than the current cost of this option.

 

 
 

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CBOE Volatility Index (VIX)