I just want to make sure I understand how these work. So lets say a January 2018 call option is quoted at $1.30. If I buy one, I think the cost is really $130. That is out the window, so to say. If on the January 2018 expiration date VIX is at or below 20, I get nothing (and lose $130). But if VIX at expiration is above 20, I think my account gets credited with an amount equal to (VIX price - 20) * 100. So if VIX is at 25, my account would get credited with $500. My profit would thus be $370 ($500 minus my $130 purchase price). Am I understanding this correctly? Do I need to actually call and tell them to exercise the option? Seems like I shouldn't when it is a no-brainer. Thanks!
Yes, the multiple on VIX options are like most equity/index options*100. VIX options are cash settled. Settlement process: http://www.cboe.com/products/vix-in...ns-and-futures/vix-options/settlement-process. If you pay 1.30 for the 20 call, your break even is 21.30 at settlement-not including trading costs. You seem to have a handle on it.
Please do realize that those Jan-2018 options are based on the VIX Jan Future, which currently trades around 14.70... and not the VIX-spot...
@Saltynuts just my 2 cents. If you are new to options trading and just starting to get comfortable with the mechanics, the VIX is a relatively complex underlying to trade options on.
But on January 2018 on the day of expiration it will converge with spot and will be settled based on the value indicated by ticker VRO
Thanks so much Robert and others. Sorry for the late reply. Curious - what exactly is VRO? Per yahoo finance it is 11.42 currently, while VIX is at 11.00. I get that the VIX options will be priced more based on VIX futures rather than VIX spot price. Just so long as at the closing I will be paid any excess of spot VIX over the strike price *100 that I think is really all I care about. Not sure what the VRO represents exactly, though. Thanks!
VRO is the exercise-settlement value for VIX options http://www.cboe.com/products/vix-in...ons-and-futures/vix-options/vix-options-specs Settlement of Option Exercise: The exercise-settlement value for VIX options (Ticker: VRO) shall be a Special Opening Quotation (SOQ) of VIX calculated from the sequence of opening prices during regular trading hours for SPX of the options used to calculate the index on the settlement date. The opening price for any series in which there is no trade shall be the average of that option's bid price and ask price as determined at the opening of trading. Click here for Settlement Information for VIX options.
Thanks Robert! So is another way to say is that the VRO is the price upon which the VIX options will be settled? I.E. if the VRO settlement value is 11.42, and I have a VIX call with an 11 strike price, I'll receive $42? How do we know what VIX options the VRO is referring to? Is it always the ones that are closest to expiring? Thanks!
The VRO is based on the opening price of SPX options. They are listed here http://cfe.cboe.com/cfe-products/vx...ion-for-vix-derivatives/vix-settlement-series