Strategies

A  A  A     

Weekly Strategy Discussion

The Weekly Strategy Discussion is designed to assist individuals in learning how options work and in understanding various options strategies. Options involve risk and are not suitable for all investors. The strategies discussed are for educational and illustrative purposes only, and should not be construed as an endorsement, recommendation or solicitation to buy or sell securities. Commissions, taxes and transaction costs are not included. Please contact a tax advisor for the tax implications involved in these strategies.

VIX out-of-the Money Bear Put Spread

Example: The CBOE Volatility Index (VIX) is at 48.00 on weaker stock markets. VIX was trading under 40 less than 1 week ago.

Outlook:You expect VIX to fall on steadier markets and are looking for a low cost trade.

Possible strategy:Out-of-the-money Bear Put Spread:
Buy 1 February 45 put at 3.60
Sell 1 February 40 put at 1.60
Net cost of 2.00 or $200.00.

*All values shown are at the time of expiration .Commissions and other trading fees not included.

Index Change
VIX @ expiration
Long 45 put value
Short 40 put value
Spread Value
Spread Cost
Net Profit/(Loss)
+4.17%
50
$0.00
$0.00
$0.00
($200.00)
($200.00)
+/-0.00%
48*
$0.00
$0.00
$0.00
($200.00)
($200.00)
-6.25%
45**
$0.00
$0.00
$0.00
($200.00)
($200.00)
- 10.42%
43***
$200.00
$0.00
$200.00
($200.00)
$0.00
-16.67%
40****
$500.00
$0.00
$500.00
($200.00)
$300.00
-27.08%
35
$1,000.00
$500.00
$500.00
($200.00)
$300.00

AT EXPIRATION: (2/20/09)
* Unchanged:Loss of $200.00
** Max Loss:$200.00 if VIX > or = 45 (-6.25%)
*** Break-even:VIX at 43.00 (-10.42%)
**** Max Gain: $300.00 if VIX < or = 40 (-16.67%)

IN SHORT: Purchase an out-of-the-money put spread for a cost of $200.00 (maximum risk) and with a maximum profit potential of $300 as a low cost trade to benefit from lower market volatility. Risk / reward ratio of 1 to 1.5

CBOE Volatility Index (VIX)