Weekly Strategy Discussion

The Weekly Strategy Discussion is designed to assist individuals in learning how options work and in understanding various options strategies. Options involve risk and are not suitable for all investors. The strategies discussed are for educational and illustrative purposes only, and should not be construed as an endorsement, recommendation or solicitation to buy or sell securities. Commissions, taxes and transaction costs are not included. Please contact a tax advisor for the tax implications involved in these strategies.

VIX Calendar Spread

 Example:    VIX Index is at $18.36

                  February VIX Futures are at $20.90

                  March VIX Futures are at $22.90

Outlook:      You are neutral on the VIX near term but have expectations of increased volatility in March. You are aware that the underlying for VIX options are the VIX futures not the VIX Index as you plan your trade.

Possible strategy:  Buy Calendar Spread to take advantage of short term time decay.                                

                           Sell Feb 25 strike call at $0.90

                           Buy Mar 25 strike call at $2.05

                                               Net Debit $1.15  

At Expiration:

• Maximum Profit = Long call value  - Net Debit
• Maximum Loss = Net Debit paid for spread

In Summary: This spread will be profitable if VIX Futures stabilize to the at-the-money strike at February expiration.  You have a choice of rolling the spread to April or remain long the March contract with the original intent of taking advantage of increasing volatility in March.  Maximum loss is equal to the debit paid for the spread.