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Is 220% gain really 220% gain?


Today we closed our VIX calendar trade for $0.80 credit, after opening it just two weeks ago for $0.25 debit. What percentage gain did we make? This is not a tricky question. Well, maybe a little bit. Any high school student would tell you that 0.80/0.25=220% gain. Correct?

 

Not so fast.

The problem is that VIX calendar is not a "standard" calendar where the only capital requirement is the debit paid. Your risk is not similar to regular calendar spread. You may lose more than the debit you pay for. The reason is that VIX options are priced based on VIX futures, not VIX cash index.

 

vix.jpg

 

Regular long calendar spreads don’t require margin. Your cost is the debit you pay. However, VIX calendar spreads requires margins. How to calculate margin requirement for VIX calendar spreads?

 

Margin requirement varies between brokers. I'm using IB (Interactive Brokers), and I believe they offer the most reasonable margin requirements: $150 per spread. Same requirement for put and call calendars and all strikes.

 

So what was the gain in our case?

 

We paid $0.25, but the capital requirement was $175 ($25+150). $55 gain equals to 31.4% gain, and this is what we will be reporting in our performance.

 

This was our seventh VIX winner this year. Previous winners included 65.5%, 38.9%, 22.2% gains, among others. All gains have been calculated using margin requirements.

 

The subscription is now open for limited time.

 

We already booked 125.4% ROI in 2015. We invite you to join us and learn how to trade VIX and other strategies.

 

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