Hey everybody, Butler here from the tastylive Research Team.
One of the main trading vehicles we use to gain exposure to volatility are VIX futures. One VIX future has a notional exposure of $1,000 per point, and requires approximately 5 to 7,000 dollars in margin to trade. Understandably, this is too much exposure and simply too much margin to tie up for many people. We wanted to find a way to trade VIX futures on a much smaller scale without sacrificing any liquidity.
So we turned to VIX options, which are priced to their corresponding VIX future. For example, VIX options that expire in June will be priced to the June VIX future. Since VIX options have notional exposure of $100 per point, you’d need 10 contracts in the VIX options to achieve the same exposure as VIX futures.
To exactly replicate the movement of a VIX future, you can trade a strategy known as a synthetic long or synthetic short. A synthetic long is comprised of purchasing a call and selling a put at the exact same strike and expiration. A synthetic short is comprised of purchasing a put and selling a call at the exact same strike and expiration. We refer to these at “VIX Synthetics.” When trading a VIX synthetic with one contract, you essentially have exposure equal to 10% of a VIX futures contract. Scale this up to 10 contracts, and you’ll have exposure equal to 100% of a VIX future. Therefore, using VIX synthetics can achieve exposure anywhere between 10% and 100% of a VIX futures contract. How’s that for flexibility?
OK, I’m Chris Butler. Thanks for watching this Market Measures Notebook!
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