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Playing the VIX With Options


VIX options and futures are very dangerous products to play with...


Hi Adam,

I am looking at a short-side play for early next year and in comparing two potential trades, SPY puts and VIX calls, I found that you pay much less for time when trading VIX options than you do SPY.

For example, March SPY 150 puts trade at 5.75 vs. 2.90 for their Jan counterparts, almost 100% more expensive. VIX 19 calls, by comparison, trade at 5.00 for March and 4.00 for January, only 25% more for the longer term contracts.

It seems you pay much less for the time to be right when playing the VIX, but am I missing something? Do longer term VIX options move considerably less than long term SPY options?

Any insight you can provide would be greatly appreciated.

Thank you,
Minyan James

Minyan James,

You have a couple things going on here, it's a bit of an apples to oranges comparison. SPY options are on a stock. It costs money to carry the stock (interest less dividends) and it's a $150 number, so the time premium on interest alone accounts for a lot of the difference between the two.

The VIX is just a statistic, there's no cost of carry. And you get no delivery of anything when they expire, just a cash settled gain or loss. Plus you can't exercise anything before expiration.

And most importantly, the option prices you see on the board are based off VIX futures, not the "cash" VIX you see on the screen. And believe it or not, both VIX Jan 19's and March 19's are ITM options. I don't have access to futures quotes, but i can tell by the options that VIX Jan futures are about 22.40, and March futures are about 23.

Why the premium? The VIX has gotten plowed recently and I believe it's just a holiday quirk (not much trading until after the 1st), so this is just an assumption it snaps back soon.

There's no particular way to game that, you can't "buy" the cash VIX, you'd have to buy real S&P options with real time decay.

So to compare them to SPY options, you would have to look at Jan and March calls that are about 15% ITM, and then adjust down the cost of carry between the 2 month's (remember VIX has no cost of carry) and then adjust up for the VIX being more volatile than the SPY. The spread between Jan and March 130's is only 2, or about 10%, which is pretty in line with the difference you see in the VIX options.

Is this all confusing? Very. Which is why VIX options and futures are very dangerous products to play with.


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