VIX Back Ratio Put Spread.

Discussion in 'Options' started by TheGoonior, Aug 4, 2011.

  1. After the huge run up in the VIX today, it seems like a perfect time for a back ratio PUT spread.

    Currently I'm looking at the following:

    1 x 2 SEP 27.5 / SEP 22.5 Put spread which can be put on for a $1.20 credit (TOS prices after close). It may be better to roll it out to OCT or NOV to give it more time to work and reduce theta decay.

    Holding period will probably be fairly short term depending on price action.

    Reasoning is as follows:

    1) Backratio has unlimited profit potential but limited risk.
    2) If VIX continues to the stratosphere, the credit is yours at expiration
    3) Historically, these large run ups in VIX correct fairly rapidly.
    4) Backratio does it's worst when you get no movement, which seems fairly unlikely in the short term.

    Drawbacks:
    1) Long option so theta and IV weigh on the position, but I don't see volatility dropping off in the near term and position won't be held close to expiration
    Anyway, nothing is certain, but there seems to be a good risk/reward here, so I may give it a shot.

    Atticus/Spindr0/MTE (and others who I apologize for forgetting), feel free to chine in and rip my plan to shreds.

    Thanks for your comments.