Milktrader

Iterating Until Convergence

Monday, July 26, 2010

Bought the VIX

Quite frankly, I'm a little ambivalent about this trade. I made it nevertheless with my judgment being that we are topping now with a little too much fearlessness. I bought AUG 20 call in VIX. The option is naked long, and expires in about 3 weeks. The premium I ponied up is $5.90. I normally despise the outright purchase of long options as either speculation or hedge, but this is the VIX product, which settles to cash and is more a play on a move in volatility than a move in price action.

I believe the VIX is oversold at these levels. Will it take more than three weeks to flush out this sentiment? Possibly. For this reason I'm going small and not going "all in" on long options. My break-even for my ITM put option is simple to calculate. In about three weeks, when the VIX future (to which VIX options are keyed) settle on their appropriately weird Wednesday, I need VIX to be at $20 (option strike) plus the premium I shelled out ($5.90) for a grand total of $25.90. Anything more is profit, anything less is loss up to a maximum risk of $5.90.
Posted by Milk Trader at 6:04 PM
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3 comments:

  1. You're already hurting so where is your point of exit?
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  2. Letting the option go to expiration. If futures settle below 20 in a couple of weeks, I've lost the the entire $5.90 at risk. Anything over 25.90 is profit. If we get a crazy selloff in the next couple of weeks, I may take a profit though if it is offered.
    ReplyDelete
  3. Update: sold my call for $4.10, taking a loss of $1.80. Anticipating a short squeeze near term. Buying ITM calls when it goes sub 20.
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