06-04-2014, 11:39 PM
I've looked at that, because it seems like it should be too easy. The VIX just goes up and down and up and down in a range... so why not trade it?
Turns out options are priced accordingly to cancel out the free lunch. Calls are extremely expensive and puts are extremely cheap. Calls only go out to November right now, but the price pro-rates to about 100% premium per year, as in if you could buy a $12 at-the-money call for 1 year from now, it looks like it would cost $12. That means the call loses 8.33% of its value per month, which is quite a headwind. The near term calls probably lose 10% per month.
Puts are extremely cheap, so there is almost no premium to gain by selling them.
What I want to know is, since you can't actually own the VIX, what sort of right or obligation goes along with the options? What would I get assigned if I am short puts in the money?
Turns out options are priced accordingly to cancel out the free lunch. Calls are extremely expensive and puts are extremely cheap. Calls only go out to November right now, but the price pro-rates to about 100% premium per year, as in if you could buy a $12 at-the-money call for 1 year from now, it looks like it would cost $12. That means the call loses 8.33% of its value per month, which is quite a headwind. The near term calls probably lose 10% per month.
Puts are extremely cheap, so there is almost no premium to gain by selling them.
What I want to know is, since you can't actually own the VIX, what sort of right or obligation goes along with the options? What would I get assigned if I am short puts in the money?