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.

Buying a Put on the VIX

Example: VIX Index is at $18.25 

              April VIX Futures are at $25.30

Outlook:  You believe the VIX Index will be unchanged or possibly lower over the next few months. 

Possible strategy: Buying a VIX Put                                

                          Buy one VIX April 30 Put at $7.00

At Expiration:

  • Maximum Profit = May be significant on downside.
  • Breakeven = Strike Price - Premium Paid
  • Breakeven: 30 - $7 = $23
  • Maximum Loss = Cost of Put
  • Maximum Loss: $7.00

 

*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.  

In Summary: The VIX is a barometer of investor sentiment and market volatility.  It is important to note that the VIX Futures are the best pricing vehicle for VIX options.  The VIX Futures trade in anticipation of where the VIX Index will be at expiration.  VIX Futures can trade at a premium or a discount to the VIX Index.  With volatility remaining stable we are taking advantage of VIX Futures and VIX Index convergence.  This trade will be profitable if the VIX futures settlement value is below 23.          

  VIX Snapshot

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