(DISCUSSION) VIX March 2013 put calendar

[Kim]

I have been considering this trade for a while. Then I came across this article - http://seekingalpha....vix-for-dummies

The thesis is:

Rather than just selling naked PUTS on VIX, when VIX is somewhat higher and shows signs of contango, a calendar spread can be effective. The best way to notice this is if the premiums on PUTS are very close, even as the expiry increases. For instance, both the January 2013 and February 2013 16 strike PUT have a bid/ask of $1.05/$1.15. This equalization doesn't exist with normal options, but as I said, VIX options are "strange." When this occurs, I look to sell the January 16 strike PUT for a credit of $1.05, and buy the February 16 strike PUT for a debit of $1.15. Total cost is a debit of 10 cents.
So if VIX rises above 16, the January 16 strike premium of $1.05 is fully earned. If the February strike is worth more than 10 cents, profit ensues. Unless VIX goes way, way, way up, gain is a very likely outcome.

I did some backtesting and it shows excellent results. I would like to make few small adjustments
1. rather than 16 strike, I noticed that doing the 17 strikes produces better results
2. Instead of doing February/January, I want to do March/January, so I can roll the short options to February after one month. Currently the trade can be done for about 10 cents credit.

Remember that VIX calendar has margin requirement. IB requires $150 per spread. So if you allocate 10% per trade, you will do ~6-7 spreads per 10k portfolio. We aim to make 15-20% return on margin within 3-4 weeks ($25-30 per spread) with fairly low risk.

[Thaze]

I grasp the general concept behind the strategy (new to calendars on the VIX), but even with the net credit you would make on the 17/17 calendar, wouldn't choosing 16 be more optimal to increase odds of success? More likely for the short option to expire worthless at the shorter strike price, even it does cost a small net debit. Not used to trading the VIX, so I'm sure I've overlooked something along the way.

Quick Question: Where did the 150 margin requirement come from? Is that just standard on all IB VIX calendars?

Edited December 14, 2012 by Thaze

[Kim]

I did some backtesting and doing the 17 calendar shows slightly better results, but it's a close call.

It is true that the short 16 is more likely to expire worthless, but if VIX is around 17, the long 17 will also have more value than 16. So it is really a matter where do you believe VIX will be a month from now. It has been trading in the 15-19 range in the last few months and 17 is the middle of this range. But if you believe that it has a better chance to stay below 16, then 16 calendar is a better choice.

The 150 margin requirement is what IB shows for VIX calendars. Those with other brokers, could you check margin requirements of other brokers please?

[Kim]

An update: I hope to see VIX below 16 this week (ideally close to 15), so I can get more credit and improve the risk/reward of the trade. Ideally, I would like to get around 40-50 cents credit on the Mar/Jan 17 calendar.

[Marco]

An update: I hope to see VIX below 16 this week (ideally close to 15), so I can get more credit and improve the risk/reward of the trade. Ideally, I would like to get around 40-50 cents credit on the Mar/Jan 17 calendar.

With VIX (spot) close to 15 I'll probably sell the Jan 15 put outright (targeting 0.70 credit). Hope we'll see some fiscal cliff 'solution' soon then I'm likely to pull the trigger.

Has more risk than the calendar but I don't mind being 'long VIX at ~14.30'. If in Jan the option is at or in the money I will roll it to Feb. Risk is obviously that VIX drops well below 15 and I can't roll for a credit.

Edited December 18, 2012 by Marco

[Kim]

VIX was below 16 on Tuesday, and I could get around 30 cents. Now the spread is trading around 10 cents debit. that's 40 cents gain, or 33% return on margin in 2 days. While in some cases the credit could be higher, but looks like 30 cents is a good credit, and next time I can get it, I probably will.

[Marco]

With VIX (spot) close to 15 I'll probably sell the Jan 15 put outright (targeting 0.70 credit). Hope we'll see some fiscal cliff 'solution' soon then I'm likely to pull the trigger.

Has more risk than the calendar but I don't mind being 'long VIX at ~14.30'. If in Jan the option is at or in the money I will roll it to Feb. Risk is obviously that VIX drops well below 15 and I can't roll for a credit.

the jan 15 Put never quite reached my 0.70 credit target, however I sold 1/4 of position at 0.65 credit should be able to buy it back for 0.05 or 0.10 today

update: (21st Dec) well not quiet. was 0.10/0.15 on the open. Was on the bid but not fill, now VIX going lower again

Update 2: (26th Dec) got finally fill at 0.10

Edited December 26, 2012 by Marco

[Marco]

playing it from the other side now. We didn't see VIX over 20 for a while and today we're there. That isn't really justified by recent HV. HV 10,30 and 60 all around 12. So the fiscal cliff fear commands quite a premium on IV. Just bought some Jan13 16 Puts for 0.25$ - assuming 100% loss so only in for small size (20 lots) and a sell limit of 1$. I think 'grand bargain' has become very unlikely but they still might come up with a 'small deal' before year end.

I'd expect IV and therefore VIX to drop in both grand bargain and small deal scenario which I think together still have some probability to get done before year end or at least in early Jan.

Edited December 27, 2012 by Marco

[jr1221]

for most of yesterday, you could get a VIX Jan/Feb 16 strike calendar for only .20. Seems an awfully low risk play for the possibility of a rally sometime the next 2-3 weeks. Today it's back up around .55 but will keep an eye on it.

[Marco]

for most of yesterday, you could get a VIX Jan/Feb 16 strike calendar for only .20. Seems an awfully low risk play for the possibility of a rally sometime the next 2-3 weeks. Today it's back up around .55 but will keep an eye on it.

the Put Calendar? You want to buy Jan?

I see that at ~ 0.20 credit at the moment. I'm not sure a Put Calendar will benefit massively should VIX drop (I take it you want to bet on that) If I look at the current atm put Cal (20 Jan/Feb) thats trading at ~0.40 credit. Also there might be a lot of timing issues if they kick the can further down the road and have no deal now but are expected to find a deal end of jan (not quite sure what term structure of VIX will do then etc.) So a calendar spread might be very tricky to trade.

[jr1221]

I meant buy Feb 16 call, sell Jan 16 call. Yesterday it was only .20 debit. Hold it a couple of weeks and, if VIX settles down, you make money. If VIX continues up, you could probably still close for .10. Seemed very low risk way to play either a fiscal cliff deal or the market simply already having factored it in. Today that debit is up to .50, so not so attractive.

[coachcr]

Marco,

It appears that the VIX may be hitting an intermediate resistance, but my main concern is what comes out of the fiscal cliff. Although, the actual spending cliff sounds like is actually in March, the tax implications start in Jan 1. When people start seeing less money in their pockets, I think spending will tighten which will pull the plug on stocks. What do you think about a strangle -too expensive?

[Marco]

Marco,

It appears that the VIX may be hitting an intermediate resistance, but my main concern is what comes out of the fiscal cliff. Although, the actual spending cliff sounds like is actually in March, the tax implications start in Jan 1. When people start seeing less money in their pockets, I think spending will tighten which will pull the plug on stocks. What do you think about a strangle -too expensive?

Well for now VIX is making new highs. God knows if and when they can come up with a solution. I think if we go over the cliff (e.g. No deal whatsoever by year end) the market will fall further. Not quite sure how the market will react in some sort of small deal (tax cuts extended for majority of Americans - wherever they draw the line, but no deal on spending cuts or debt ceiling) we might get some relief rally (especially now that we came quite a bit off the highs. But I think in the end this means the haggling will continue for another couple of months on spending cuts and debt ceiling - I don't see a sustained rally in that sort of scenario.

I think VIX is high here and I'm looking for ways to profit from a pull back without exposing myself too much for a scenario where there is no deal and the markets go into panic mode (which they shouldn't really as the immediate impact on the economy is limited, but of course is terrible for overall sentiment)

You are thinking of buying a strangle on the market or on VIX? I think both are rich now and you need a decent move up or down to break even so unless you expect a grand bargain (and big rally) or no deal at all (and a big drop) I think it's a bit late for a strangle now and I would play it with a strategy that isn't quite as long vega and requires a lower break even (like a RIC)

But as I said I personally DON'T expect a massive move (5%+) and I'm looking of ways to profit from IV pulling back without losing my shirt if I'm wrong.

Buying VIX puts was one way I came up with (looks I can write off that jan 16 puts though - but you never know) the other thing I'll be looking at if we still have no deal on Mon is to sell a IC to feb or mar (need to look at the no's). With maturity at least 6w it should be relatively robust vs. a say 3-4% move and profit from IV pulling back.

[coachcr]

It's absurd that our government has put our country in this situation. The market is hanging on every word of the politicians. Yes, I agree price is high now for a strangle. Obama is going on "meet the press" Sunday to continue to press the republicans into caving. Monday should be pretty crazy, but my guess it that the deal doesn't get done until after trading hours Monday and market will rally on Wednesday (but who that heck knows). Guess we'll wait and see how this all pans out (this reminds me of the reason why I was interest to join this site - non-directional trading! Let's all hope for the long-term best for us and our country

[Marco]

playing it from the other side now. We didn't see VIX over 20 for a while and today we're there. That isn't really justified by recent HV. HV 10,30 and 60 all around 12. So the fiscal cliff fear commands quite a premium on IV. Just bought some Jan13 16 Puts for 0.25$ - assuming 100% loss so only in for small size (20 lots) and a sell limit of 1$. I think 'grand bargain' has become very unlikely but they still might come up with a 'small deal' before year end.

I'd expect IV and therefore VIX to drop in both grand bargain and small deal scenario which I think together still have some probability to get done before year end or at least in early Jan.

closed for 0.95 today. timing wasn't perfect as the VIX spiked another 10% after my entry and I could have bought the 16 Put for 0.10 (or the 17 Put for 0.25) but I wont complain about 280% return on a quick gamble.

Now looking to sell the Jan13 15 put again. Waiting for 0.5+ credit

[Kim]

With VIX at 15.50, I entered April/February 17 put calendar for 0.25 credit. Looks like you can get more now, maybe 0.30-0.35.

[kowski06]

got filled at .30 cents

[Xfanman]

With VIX at 15.50, I entered April/February 17 put calendar for 0.25 credit. Looks like you can get more now, maybe 0.30-0.35.

Yeah looked like I could have been filled around .35 except the RUT drop today put my account under 25k so now I'm locked out of margin trades until I deposit more $ or RUT goes back up

[Kim]

Yeah looked like I could have been filled around .35 except the RUT drop today put my account under 25k so now I'm locked out of margin trades until I deposit more $ or RUT goes back up

How is 25k account related to margin trades? 25k is about day trading, not margin trades.

[srf335]

Executing this trade on ToS is requiring $1681 margin per spread, an order of maginitude greater than what you list with IB. Is this something specific ToS? I've never encountered such a large discrepancy.

I've double checked my order ticket three times and bottom line is it will cost me $1700 buying power to have a chance at earning $25-30. That's a non-starter.

[Xfanman]

How is 25k account related to margin trades? 25k is about day trading, not margin trades.

Because I'm tagged as a PDT and when you drop below 25k in Equity you can't trade on Margin any longer unless you add funds or have your account reset (but still can't PDT with under 25k).

[Kim]

Executing this trade on ToS is requiring $1681 margin per spread, an order of maginitude greater than what you list with IB. Is this something specific ToS? I've never encountered such a large discrepancy.

I've double checked my order ticket three times and bottom line is it will cost me $1700 buying power to have a chance at earning $25-30. That's a non-starter.

That doesn't make sense at all. Even naked put margin is around $400, with calendar the Feb. short put is partially covered by the Apr. long put so the margin is lower.

[Hannes Kury]

tried 0.30, no fill

1/2 position fill at 0.25

will try other half at 0.30

[Marco]

Executing this trade on ToS is requiring $1681 margin per spread, an order of maginitude greater than what you list with IB. Is this something specific ToS? I've never encountered such a large discrepancy.

I've double checked my order ticket three times and bottom line is it will cost me $1700 buying power to have a chance at earning $25-30. That's a non-starter.

that looks high, IB showing me 261$ margin per trade (dunno how Kim got 125$, but at least we're somewhat in the same ballpark)

Also the profit potential is more than the credit - this trade could go to a negative premium (or a positive if you see the current credit as a negative premium)

[srf335]

Just got off the phone with ToS options suport. They're sticking to their guns and saying these are firm margin requirements based on the increased risk of trading VIX due to it's inherent volatility - it's not a mistake.

Would be interested if any other ToS users would confirm if they are seeing similar requirements.

[Kim]

that looks high, IB showing me 261$ margin per trade (dunno how Kim got 125$, but at least we're somewhat in the same ballpark)

Also the profit potential is more than the credit - this trade could go to a negative premium (or a positive if you see the current credit as a negative premium)

The $125 capital requirement is based on 150 margin less 25 credit. Just double checked again - it is indeed $150 margin.

The $1,700 doesn't make sense at all. Even if you sell the 17 naked, your maximum THEORETICAL risk is $1,700 if VIX goes to zero, but they never calculate margin this way.

[chanson]

With VIX at 15.50, I entered April/February 17 put calendar for 0.25 credit. Looks like you can get more now, maybe 0.30-0.35.

Hi Kim,

Forgive me if this is a dumb newbie question, but where do I find the rationale behind this trade, the risk/reward profile, the exit strategy etc.? How much difference does it make whether I get it at .25 or .30 (currently bid/ask are 0.10/0.20)? Given that IB takes $4.80 per spread as commission, there's almost no credit left - but presumably the credit isn't the point of the trade. As I said, apologies for the newbie questions.

Thanks!

PS IB shows me a margin of $113 per trade.

[mcmatterson]

Happy New Year everyone. Filled at a credit of 0.30. I don't understand why the market would price options this way. Shouldn't longer-dated strikes always have more time value?

[Kim]

Hi Kim,

Forgive me if this is a dumb newbie question, but where do I find the rationale behind this trade, the risk/reward profile, the exit strategy etc.? How much difference does it make whether I get it at .25 or .30 (currently bid/ask are 0.10/0.20)? Given that IB takes $4.80 per spread as commission, there's almost no credit left - but presumably the credit isn't the point of the trade. As I said, apologies for the newbie questions.

Thanks!

PS IB shows me a margin of $113 per trade.

The rational is described in the first post of this topic.

I would try to get as much credit as possible. VIX is slightly higher now which makes the trade slightly more expensive. You are correct about commissions, and assuming $125 capital requirement, that's almost 4% which is pretty high. However, if I can sell it for $25 debit, I get $50 gain per spread which is 40% return on margin before commissions or 36% after commissions.

[Marco]

Happy New Year everyone. Filled at a credit of 0.30. I don't understand why the market would price options this way. Shouldn't longer-dated strikes always have more time value?

not on VIX, as you actually have options on Feb and Apr futures

see term structure of spot vs. futures here: vixcentral.com

[Hannes Kury]

Kim,

what is your strategy (target, max loss, holding time) on this trade?

[Kim]

Happy New Year everyone. Filled at a credit of 0.30. I don't understand why the market would price options this way. Shouldn't longer-dated strikes always have more time value?

This is true for "normal" calendars, but not VIX. Please read the first post and the following discussion. VIX options are options on VIX futures and this is the reason for the pricing. This trade has very low risk as long as VIX stays above ~15+. If it goes below 15 for an extended period of time, the trade will lose money (probably not much, maybe $20-30 per trade worst case).

[Kim]

Kim,

what is your strategy (target, max loss, holding time) on this trade?

Please read the first post.

[chanson]

The rational is described in the first post of this topic.

I would try to get as much credit as possible. VIX is slightly higher now which makes the trade slightly more expensive. You are correct about commissions, and assuming $125 capital requirement, that's almost 4% which is pretty high. However, if I can sell it for $25 debit, I get $50 gain per spread which is 40% return on margin before commissions or 36% after commissions.

Thanks, I think I get it. I was able to sell for 0.24. Is the expected retention period until February expiration, or are you expecting to roll the short option before that?

[csensen13]

_{For what it's worth, Options House also seems to require a $1700 margin/spread....then again they were the ones that wiped out 100K of buying power when RUT went ITM a month ago....}

[Kim]

Thanks, I think I get it. I was able to sell for 0.24. Is the expected retention period until February expiration, or are you expecting to roll the short option before that?

That depends on VIX behavior. If it stays at current levels, the trade will gain value very slowly due to positive theta. If VIX jumps back to 17-18, the trade can gain very quickly and we can close it.

[mks212]

That doesn't make sense at all. Even naked put margin is around $400, with calendar the Feb. short put is partially covered by the Apr. long put so the margin is lower.

I tried to enter this trade and saw the margin requirement is in fact just under $1,700 as srf335 said. I just got off of the phone with TOS. Their rationale is that because the price of VIX options can get so "away" from one another, in a way that simply doesn't happen with regular equity options, the margin requirement is as though you are simply selling one short option. In this case, the Feb. The Apr does not cover it in their eyes. This obviously makes the trade unattractive so I will have to pass.

[Kim]

Well, with equity options you don't have margin requirements at all. The April does not completely cover the February, but covers it partially. But even if they treat it as naked put, the margin requirement for naked put is 20% of the underlying price, which is around $400 in this case.

Another reason to switch to IB.

[Guest]

Hi,

VIX index is down over 2 1/2 today. I paid a nickel for the Feb/Apr 15 calendar spread and bot the Feb/Jun for no money.

Any thoughts are welcome,

TIA

[Kim]

Hi,

VIX index is down over 2 1/2 today. I paid a nickel for the Feb/Apr 15 calendar spread and bot the Feb/Jun for no money.

Any thoughts are welcome,

TIA

Well, I did the 17 for a credit. The 15 gives you more downside protection if VIX goes below 15, the 17 will gain more if VIX rises. Historically 17 was usually a better play since there is more chance of upside for VIX at those levels.

[mks212]

Well, with equity options you don't have margin requirements at all. The April does not completely cover the February, but covers it partially. But even if they treat it as naked put, the margin requirement for naked put is 20% of the underlying price, which is around $400 in this case.

Another reason to switch to IB.

So, in this case, would it make sense to open the trade with TOS anyway? The reason I ask is because I have the capital available since my only open trade is the MOS straddle. I know that normally, we look at margin requirement as the true cost, which I agree with, but in this instance the requirement on the part of TOS seems to be erroneous.

[Kim]

So, in this case, would it make sense to open the trade with TOS anyway? The reason I ask is because I have the capital available since my only open trade is the MOS straddle. I know that normally, we look at margin requirement as the true cost, which I agree with, but in this instance the requirement on the part of TOS seems to be erroneous.

If the capital is not an issue for you, then I would still open it. But we will start adding more trades, so the VIX trade might tie too much capital. The real risk of this trade is probably no more than $50 worst case (I have never seen the 17 put calendar trading below 50-60 cents credit).

[Rogers]

going to pass because of TOS margin

[Guest]

Thank you, Kim. Which months did you do?

[Kim]

April/Feb.

I sent a trade alert few hours ago. You should the TRADES forum if you want to get the trade alerts.

[Marco]

closed for 0.95 today. timing wasn't perfect as the VIX spiked another 10% after my entry and I could have bought the 16 Put for 0.10 (or the 17 Put for 0.25) but I wont complain about 280% return on a quick gamble.

Now looking to sell the Jan13 15 put again. Waiting for 0.5+ credit

got filled on Jan13 VIX 15 Puts at 0.45 just before the close. Not quite as much premium as I wanted as IV of VIX options collapsed with VIX today. So didn't do a full position so I can avergage down in case VIX (or rather the Jan future - as its trading ~0.9 above spot now) drops further. But had to get involved with VIX spot below 15 again now. I'm not quite sure why market is SO bullish. We only got 1/2 of a deal done, at the 11th hour, well infact it was PAST the deadline even though they had 1 1/2 years to figure something out and congress almost blocked that mini deal. So the next 2 months going to be more of the same. Endless haggling about debt ceiling and spending cuts. Plenty of opportunities for VIX to be higher then where we are now. However I think politicians might give it a rest for a few days before they start on the next issue so market might not turn tomorrow. (as much as I'd like that as I'm getting a bit short here....)

Edited January 2, 2013 by Marco

[csensen13]

Marco - thanks for your insight on VIX - the trading is quite intriguing since it is different from regular options - quick question, since it appears that some brokers put the screws to an investor with "strange' margin requirements (as in TOS and OH), selling naked puts is a bit cumbersome - would you suggest (or suggest against) going long on calls? I know they tend to be more expensive than puts, but other than that is there anything else to consider?

[coachcr]

Got filled on the Apr/Feb 18 Put calendar for 0.40 credit around lunch time today.

[Marco]

Marco - thanks for your insight on VIX - the trading is quite intriguing since it is different from regular options - quick question, since it appears that some brokers put the screws to an investor with "strange' margin requirements (as in TOS and OH), selling naked puts is a bit cumbersome - would you suggest (or suggest against) going long on calls? I know they tend to be more expensive than puts, but other than that is there anything else to consider?

well bit of a different trade as you PAY premium and therefore theta so you need VIX (futures) to move up really. The idea with selling puts is that even if they end up in the money (by not a massive amount) you can roll them for a credit and eventually VIX will go up - time is on your side here whereas if you buy calls time works against you. On the upside calls have an unlimited upside potential wheres I can only make the premium on the puts.

So while I think VIX is quite low here I like about the Put trade because I have time on my side as it can remain low for a while if harmony breaks out in D.C. all of a sudden.

[Hannes Kury]

During 2012 I have been trying on multiple occasion to make money being long (short puts) the VXX. Overall I lost money, so I decided to stop doing it. Since then the only VXX trade I consider is shorting it when it goes up significantly (VIX above 20) for a short-time trade. This has worked every time but I am aware that the VIX could stay high an extended period of time, so position sizing is important.

Currently I am in Kim's VIX Apr/Feb calendar spread.