Hi all, First of all, I wanted to say that I am new to EliteTrader, having read alot of the posts however, but never posting here before. I used to post and read on the Yahoo board and I remember OptionsCoach, Spin and a few others. My general trading style is to be long options, but I will sell sometimes as well, mainly either doing credit spreads or calendars. Anyways, I wanted to ask a question about the VIX options. I have read a bit about them and understand they are different then normal stock options in that they are cash based and they expire on different days, etc, but I was testing a calendar on the OptionsXpress Trade Calc page and noticed that even for a normal debit calendar spread, it shows options requirements higher then the cost. For example using todays pricing: Sell 10 July 19 Calls - -$700 Buy 10 Aug 19 Calls + $1150 Total Cost = $450 - I believe this is also the max risk, and the chart they show would seem to imply this as well. However, "Option Requirements" says $5,313 for "Total Requirments" of $5,763. Even if VIX isn't quite a standard option, why would there be such requirements when the loss cannot be that large? BTW - This is not a trade I plan to do, but an example of what I saw. Do VIX call calendar spreads really require this amount of margin, or could this just be a mistake by the Trade Calc program or what do you think? Would all brokers require that much margin for that trade? Thanks in advance. Jim J. The O.C., CA
A long calendar spread in any of the vix derivs is not a defined risk position. You could lose substantially more than the debit you paid. Do a search on backwardation.
Vix me http://mediaserver.thinkorswim.com/transcripts/Mar_1_2006_New_VIX_Options.pdf http://optionsguy.financialblogs.com/post/blog/Decoding_the_VIX.html http://optionsguy.financialblogs.com/post/blog/decoding_the_vix_ii.html
OK guys, thanks for the links and comments. I think I get the jist of it, but I will read in more detail later. Personally, I wish the people resonsible for making new options would try to keep the normal standards in place - personally, I think things like this keep people out of options, because they are afraid of things like this. What I mean is many years ago, they standardized on 3rd Fridays, 100 shares, etc. Of course, there are some adjustments when stocks split, are bought out, etc., but the basic idea was that if you bought or sold an option, you knew what you were getting into and wouldn't get surprised. Now, you almost have to study each option and make sure it isn't different then other ones. This would be like if they decided to make GOOG options only represent 30 shares for example. Someone would buy a call and not realize they were only controlling 30 shares, and would be told they should have looked it up or something! Or, if some options expired on the third Monday or whatever. Either standards are in place or they aren't in my opinion. Oh well. It just seems to me like they could do something to make the VIX options cash settled, but standard terms otherwise. It seems difficult the way it is now - for example: How would a person figure the max loss on a July/Aug call calendar for example (is it even possible to determine)? Again, thanks for your reponses. I'm sure I sound like a newbe or sound stupid or something, but I do understand standard equity options quite well (One of my fav plays when there are good skews is double calendars with extra longs) - I don't trade futures and don't ever plan to. Jim J. The O.C., CA
Under current vvol your long 19 call calendar will invert(trade at a credit) at around 24 on the vix. Beyond that, to help you picture the risk intuitively, it's like holding a short index put with no deltas. You lose on $vegas into a market decline. A long vix calendar is a short index vol bet, so hedge accordingly. Study the vix futures before you trade a single lot in these.