The VIX is a very nuanced product, today Tom and Tony break down various ways of executing a Covered Call in the VIX.
One of the difficulties when trading the covered call in the VIX is there is no spot VIX market, so we must use /VX as the underlying or we can use an ETN on the VIX like VXX. We look at the pros and cons of three different ways we might set up this trade.
Buying 1 /VX Future and selling 10 VIX Calls
Buying 100 VXX Shares and selling 1 VXX Call
Synthetic Covered Call in VIX
The VIX index is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. The VIX is determined through a numerical calculation. Futures on the VIX (/VX) are determined by what people think the VIX will be trading at in the future. Options are listed on the VIX but priced off of /VX. Due to this a 50∆ (delta) option on the VIX will not always be lined up with the spot VIX price. At Expiration /VX = VIX.
VXX is based on a portfolio of the nearest two VIX futures. When the futures are in contango (which is 88% of the time), a slow decay occurs in the product. In order to profit from buying VXX the stock needs to go in your favor with in the first few trading days otherwise you will experience losses. These losses can be partially offset from selling a call.
Be sure to tune in to here Tom and Tony break down these results!
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