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

Example:             VIX Index is at $16.59 

                         March VIX Futures $19.45

Outlook:             You are bullish on the VIX Index 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 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

$.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

*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: This spread will be profitable if the VIX futures rise above 23.5 but the profit potential is limited at 27.5 Risk is limited to the total premium paid for the spread.  Have a timeframe in mind to realize your forecast.      

CBOE Volatility Index (VIX)