Tuesday, September 15, 2009

The Looming VIX Expiration

With VIX options expiration on the horizon, we've got some interesting 1 day potential plays for those with the gambling spirit. First off, those unfamiliar with VIX options would be wise to check out the CBOE VIX options specification page. Per the aforementioned page VIX options expiration is:

The Wednesday that is thirty days prior to the third Friday
of the calendar month immediately following the expiring month.
Talk about a mouthful... The majority of the time (8 out of the 12 months in 2009) VIX expiration falls on the Wednesday within the normal equity options expiration week. For the record, the other 4 expiration days occur on the Wednesday following equity options expiration week (at least in 2009). Check out an options expiration calendar to view the dates.

Currently the VIX cash sits around 23.80 with September VIX futures sitting right at 23.70. Remember, the VIX cash and the front month VIX futures converge at expiration. Thus, the settlement price for Sept. VIX futures and VIX options should be identical. Although there may be a wide disparity between the two prior to expiration, sometimes the futures trading at a premium, sometimes at a discount; as expiration approaches that disparity will incrementally diminish until they both settle at identical prices. Since there is currently only a .10 difference between the two, you can see the disparity has all but disappeared.

If we look at the current option chains via a put matrix (a trick I picked up from Bill over at VIXandMORE). The logical choice for which option to play into expiration is the Sep 25 put (the graphic didn't come in that clear, so click on it to enlarge).

[Source: OptionsXpress]
Even as a gamble, the Sep 22.50 is probably too far OTM to make it worthwhile, and the 27.50 is probably too far ITM. Currently the Sept. 25 puts are sitting around $1.40, a mere $.20 over parity. So, if I wanted to bet the VIX continues to drift lower (SPX continues sideways to bullish) for the remainder of the day and we get a lower settlement price tomorrow, I could buy the put outright. As long as the settlement price were $23.60 or lower, I would have a winner.

Conversely, if I thought it a better bet the VIX would ramp higher for the remainder of the day and we get a higher settlement price tomorrow, I could sell the put outright. As long as the settlement price was higher than $23.60, I would have a winner. Remember, the VIX options are European style and settled in cash, so even if the short put expired ITM you wouldn't have to worry about buying shares of the VIX. Indeed, it's not even possible to trade shares of the VIX as there aren't any available.

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