Tuesday, November 17, 2009

VIX Expiration Dilemma

Since tomorrow is expiration for VIX options and futures, today is the last day to adjust/close out any November VIX plays trader's may have on their books. Last Thursday, I mentioned selling the November VIX 22.50 puts for $.60 credit. Fortunately the VIX has since stabilized causing the 22.50's to remain out-of-the-money. Right now the cash VIX is sitting around 23.10, with November futures trading a bit higher at 23.40. Remember, the futures will converge to the cash by tomorrow's settlement, so the discrepancy between the two will dissipate throughout the day.

Here's the dilemma: do I close out the naked puts today to lock in whatever profit I've accumulated thus far? Or, do I go ahead and ride it into tomorrow's settlement and hope we settle above $22.50, thereby capturing my entire potential profit?

It's worth mentioning this is the dilemma facing any trader short slightly out-of-the-money puts with one day remaining to expiration.

Hopefully you all know there is not one "right" answer. Trading is about trade-offs, so let's explore those associated with this particular play.

1. Close the puts sometime today to avoid the potential drama/ quirks of VIX settlement.

Pro: Closing the trade locks in the majority of potential profits and eliminates any remaining risk.
Con: Obviously if you close them now you fore go any remaining profit.

2. Hold the trade through tomorrow's open and subsequent settlement in an effort to realize max profit. This occurs if settlement price for VIX options is greater than $22.50

Pro: I get to realize my enter max profit.
Con: If the VIX tanks today and closes near or below 22.50 OR if it remains around 23 but we get a skewed settlement tomorrow, you run the risk of not only giving back what profits you've accumulated, but also incurring a loss in the trade.

What to do, what to do....

To me it's a no-brainer. If I can snatch those puts back for $.15 or less, I'm outta here... Adios amigo. In the long run, those last few cents aren't worth it in my opinion. Now, I will say if the VIX continues to trend up today, I may ride close to the bell in an effort to buy them back for as cheap as possible ($.10 or $.05), but it really depends upon market conditions.

If you think the potential risk of a crappy settlement is worth making the last $.10 or $.15, then by all means, ride to expiration. Just keep in mind you're going to get steamrolled every once in awhile. That I can almost guarantee!


Anonymous said...

Nov09 Vix settlement 22.54

Anonymous said...

how about selling some upside call spreads on dec09 vix, ie 32.5/35?

Tyler Craig said...


I'll respond to the call spread question in my next post. Thanks for the comments-


Now that excellent.