This segment reveals the results of a study to determine if a synthetic covered call using VIX options is a reasonable substitute for a covered call using the futures (/VX). This is especially helpful for smaller accounts but also is a way larger accounts can get experience with volatility products with less risk than the /VX.
The October 28, 2015 segment of Market Measures studied the strategy of covered calls using the /VX as the underlying and VIX calls as the offset. This strategy performed well when the VIX was under 15 when the trade was initiated.
The problem is the high margin requirement of $5000. We therefore wanted to test to see if the results could be duplicated or could come close by using synthetics. Using the minimum we could establish a position of one-tenth the size and margin.
The original study was reviewed. A table of a /VX covered call with the /VX trading below 15 was displayed. The table included the average P/L, percentage of being profitable and margin required for the covered call. A restructuring of the possible /VX trade was displayed. The trade included the strategy of a /VX covered call (long 1 /VX, short 10 VIX calls) as well as a synthetic version of a small VIX covered call that was a synthetic /VX long (+ 1 call, -1 put) and a covered call (short 1 OTM call) that was 10% the size of the first trade.
A study was conducted of VIX futures and options from June 2008 to present. At VIX settlement if the /VX was below 15 we bought one synthetic long VIX (+1 call, -1 put at the same strike in the option cycle closest to 30 days to expiration). We then sold the first out-of the-money (OTM) call against it. An example of the November /VX trading at $16.25 was displayed. In this case for the VIX synthetic long we bought the November 16 call and sold the November 16 put. For the VIX short call we sold the November 17 call.
A table comparing the synthetic long to the VIX covered call when the /VX was below 15 was displayed. The table showed the average P/L, percentage of being profitable, largest profit and largest loss for both strategies.
Watch this segment of “tasty BITES” with Tom Sosnoff and Tony Battista for the takeaways and to learn what you need to know using a VIX synthetic covered call as a substitute for /VX covered calls.
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