Strategies

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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 Vertical Call Spread and Adjustments

Example:                 VIX Index $16.59 

                                March VIX Futures $19.45

Outlook:                  You are bullish on VIX and expect it to rise over the next couple months. 

Possible strategy:    VIX Vertical Call Spread:                                

                                  Buy one Mar 22.5 strike Call at $2.00

                                  Sell one Mar 27.5 strike Call at $1.00

                                                     Net Debit (cost)    $1.00

 *All values shown are at the time of expiration .Commissions and other trading fees not included.  VIX expiration is the Wednesday 30 days prior to the next month's option expiration.  The last trading day is the Tuesday before the Wednesday of VIX options/futures expiration. 

VIX Index

Long 22.5 VIX Call

Short 27.5 VIX Call

Net Profit
(Loss)

20

($2.00)

$1.00

($1.00)

  22.5

($2.00)

$1.00

($1.00)

25

$0.50

$1.00

$1.50

  27.5

$3.00

$1.00

$4.00

  30

$5.50

($1.50)

$4.00

 

 At Expiration:

  • Maximum Profit = Difference in Strike Prices - Net Debit
  • Maximum Profit: (27.5 - 22.5) - $1.00 = $4.00
  • Breakeven = Lower Strike Price + Net Debit
  • Breakeven: 22.5 + $1.00 = $23.5
  • Maximum Loss = Net Debit
  • Maximum Loss: $1.00

March 4, 2011:  VIX Index at 19.06, March VIX Future at 20.05

1st Adjustment:

Buy one March 27.50 Call at 0.25 (to close)

New Position: Long one March 22.50 call at 1.25

 

March 10, 2011: VIX Index at 21.88, March VIX Future at 22.22

2nd Adjustment:

Sell one March 24 Call at 0.70 (to open)

New Position: Long one March 22.50 call
                     Short one March 24.00 call
                     Net price: 0.55 debit

 

March 11, 2011:  VIX Index at 20.08, March VIX Future at 21.25

3rd Adjustment: 

    Buy one March 22.50 Call at 0.45 (to open)

    Sell one March 24.00 Call at 0.25 (to open)                                                                 

                                                  0.20 debit

    New position: Long two March 22.50 / 24.00 Call spreads at a net debit of 0.375 each

 

March 15, 2011: VIX Index at 24.32, March VIX Future at 24.60

Final Trade:

    Sell two March 22.50 Call at 1.85 (to close)

    Buy two March 24.00 Call at 0.55 (to close)

                                              1.30 credit

    1.30 less 0.375 = 0.925 x 2 = $185.00 profit

VIX and March VIX Futures prices are end-of-day closing prices. All trades were initiated intra-day.

In Summary: The original spread would have been profitable if the VIX futures rose above 23.5 with the profit potential limited at 27.5 Adjustments were made up until expiration to maximize profitability. 

CBOE Volatility Index (VIX)