I bought one VIX Aug 18'20 CALL for about USD60 just to learn about VIX options. I don't understand why it's acting like a put: its value decreases as the VIX rises, and increases as it falls. Shouldn't it be the other way? My break-even should be positive, based on the VIX value of when I bought it? As the VIX falls away from my strike of 100, shouldn't it be worth less? You can see the reddish break-even line in my chart below. If I go BELOW this line, the call value increases... it's acting like a put?! I'm so confused.
There is almost no chance that VIX will go to 100, so the call should simply decay. As for what’s happening, it may be perfect example of convexity just mentioned here: https://www.elitetrader.com/et/threads/stocks-vs-options.344711/#post-5098608 And that’s the fun and potential edge in trading options, if you spend 1000+ hours studying exactly such movements.
Your strike is waaaaay out of the money at 100. Look at the VIX futures to see what I mean. You might be seeing random fluctuations but overall that strike option is not going anywhere because VX futures did not come close to 100 I believe even on the spike. You do not learn how something works with a far far OTM option as they will not have realistic greeks or price movements.
With the strike and time you picked (Aug 100 Strike), the predominate influence on that option price is volatility, not delta -- look at your Vega on that position (and observe the IV change).
I see what could be a bug in TWS? For those with IB, does this happen for you? 1. View the VIX option chain 2. Choose a strike price for a Call (say, 50), and click on the bid price to buy. 3. Note how the order window defaults to "SELL" Anyone else see this?
Your option value changes based on several factors, so the premium change you see is the net effect of all those (Delta, Vega and Theta being the 3 most influential ones). The P/L you see highly depends on your broker (IB) position valuation algorithm. You also have to know that VIX Index options are European options (So they are priced differently from normal American options, though the BS model was devised for European options mainly). Moreover, VIX Index options are cash settled against a VIX special opening quotation (SOQ) published on the day the VIX same month futures expires (In this case, 19-Aug morning). The line shown in your chart shows your purchase price, below it, your position P/L should be negative irrespective of anything else and above it, your position is making money (Based on the quotations in the market of course) Finally, the VIX options are even more complex & bizarre because they are priced throughout their lifetime based on the respective VIX future but settle against something else (VIX futures settle also against the SOQ on the expiry day). VIX Index is simply NOT the underlying here throughout the lifetime of the option.