Are you sure about that? How were they priced when there were no VIX futures? http://www.cboe.com/Products/indexopts/vixoptions_spec.aspx
I was actually thinking about the same idea. I even took it further: instead of straight VIX call, how about diagonal? For example, you can buy 10 Apr. 35 call for at $2.0 and sell 10 Jan 40 calls for $0.4. Total cost: $1,600. If VIX goes to 40 at Jan expiration, you should make about $7-8k. If it stays stable, you should be able to sell Feb and Mar 40 calls and almost recover your cost. The problem with this strategy: There is not always correlation between VIX and 3-5 months VIX futures. Someone told me (I didnât check it) that in last October when VIX was around 80, few months futures were less than 45. If this is the case, the spread strategy can actually lose money if VIX jumps to 35-40: April futures might stay around 30, and you will lose on both sides. Buying calls only might be expensive and not to provide enough protection, for the same reason.
Lets take an example the VIX jump from 20 to 40 20 points will guarantee us a nice profit , even if the IV stays the same ( the IV of the APR40 CALL VIX) I'm sure the IV of APR calls will jump as well . how much I'm not sure. But it should guarantee a nice profit. "The problem with this strategy: There is not always correlation between VIX and 3-5 months VIX futures. Someone told me (I didnât check it) that in last October when VIX was around 80, few months futures were less than 45." - is it true? can someone confirm?
Yes, I am. It doesn't actually say in the contract specs, you really have to get into the way they work and how they are priced. VIX options are probably the most misunderstood product. So, once again, VIX options are priced off of VIX futures not the spot VIX. I'm not going to go into the reasons as you can use the search button here on ET as well as Google and find the explanations. By the way, VIX futures came about 2 years before VIX options.
If you are talking about straight calls, you are probably correct. With VIX at 40, April futures might be around 30-35. On 2 contracts, you might be talking about 1k profit, maybe less. Is it enough to protect your portfolio? If your portfolio is only 10k, itâs 10% protection, but you also spend 4% on 4 months insurance which most probably will be lost. In case of the spread, 10 contracts might give decent protection to 50k portfolio, I spend about 3% on it and I might recover most of this cost. But the question again â will it play out as âhopeâ it will?
Why do you think that this is a better way of hedging your positions than using the options of the actual underlying? What is the 45 in VIX 45 MAY10 CALL ? The number you're buying ?? Am I correct in that this option costs approximately $18 with the VIX at 22.50 ($6 of TP) ? If so, why is that a good hedge?
All of this is 100% true. Vix options are based on the futures of the corresponding months. Prior to the introduction of vix futures, yes the vix spot already existed but it was what is called a "non-investable" index. That means you could not buy the index or a basket equivalent to the index. In many respect the spot vix is still non-investable. On the cboe website there are many free webcasts that will give you much more info on all of this...
45 strike price . the current price is 1.15$ I think its better hedge for quick movements, because it is much more sensitive to large quick drops. So you can buy much cheaper insurance.
If your going to do it with VIX ops, match the IC expiry with the VIX expiry, or just use the front month VIX.