charting european time spreads

Discussion in 'Options' started by DennisR, May 2, 2008.

  1. DennisR


    if you put on a time spread in a european style option, is it possible to have an accurate risk chart if you cant purchase the underlying, such as the VIX? It's a tough question but think about it. I get charts in TOS but i think it's a programmed output that doesn't apply in the real world. Basically my theory is that since you can never exercise (or even sell short early to arb like you would in european options) you are always at the mercy of the options pricing. This would technically leave you with unlimited risk.

    short may 25 vix call
    long june 25 vix call

    if vix spikes to 40 near may expiration, june calls would rise but not go intrinsic on the expectation of vix to settle down by june expiration. Any opinions on this?
  2. DennisR


    In a nutshell I'm saying the TOS charts are incorrect, no true risk chart can be drawn.

    Agree? Disagree?
  3. You are correct. No retail software currently on the market can model vix curvature, hence vix ops are modeled incorrectly.
  4. DennisR


    yes, but i also argue that it can't be done ever. There's no way to ever model it correctly unless they allow trading on the underlying. Thanks for the confirmation though. I thought I might be missing something.

  5. Yes you are missing something. It's called VIX futures.
  6. DennisR


    I've never traded futures and am not sure what you mean by this. Do the futures allow an arbitration, hence holding the option pricing at intrinsic levels at the least?
    Forgive me being naive, I appreciate your help.