The VIX index measures in real-time a composite of 30-day implied volatilities of various puts and calls
Question:
The VIX index measures in real-time a composite of 30-day implied volatilities of various puts and calls on the S&P 500. Puts and calls on the VIX itself for various expiration dates are traded on the Chicago Board of Exchange. On or about April 5, 2021, a trader executed a very large call spread by buying VIX July 21, 2021 calls with a 25 strike and selling July 21, 2021 calls with a strike of 40. Here are some additional details:
Price of call struck at 25: 3.40 Implied volatility: 125%
Price of call struck at 40: 1.30 Implied volatility: 135%
Number of call spread contracts executed: 200,000
VIX level as of 4/5/21: 17.91
Draw the profit and loss payout of this option combination at its expiration on the graph below
b) Using the Internet or another relevant source, look up the contract specifications for CBOE
VIX options. Given the multiplier formula applicable for these options, calculate (i) the
total net premium cost of these 200,000 call spreads, and (ii) the maximum profit potential
of this call spread. Express both answers in U.S. dollars.
c) Would you characterize this call spread as representing a bullish or bearish position with
respect to the underlying equity market (i.e., the S&P 500)?
d) Navigate to the following URL: https://www.barchart.com/stocks/quotes/$VIX/options and
evaluate the prices of July expiration VIX calls as of the close of business on either
Tuesday, May 4, or Wednesday, May 5, 2021. Using this table, calculate the dollar amount
the trader would have to pay to exit this trade and compare that value to the initial cost of
the call spread. Show the inputs used to arrive at this calculation.
Smith and Roberson Business Law
ISBN: 978-0538473637
15th Edition
Authors: Richard A. Mann, Barry S. Roberts