1) Read the below WSJ article describing a large VIX options trade that was placed this summer. Use Excel to construct payoff and profit diagrams assuming the position is held to expiration.

2) Answer our basic questions about the traders position bullish/bearish/neutral, is the profit limited or unlimited, etc. Find dollar values for the maximum profit and loss, if they exist. Find the expiration prices of the underlying corresponding to these values and the breakeven.

Your submission should include an Excel file with your diagrams/tables and answers to question 2. This is an individual assignment.

Investor Shows No Fear, Bets Big on VIX

Banerji, Gunjan . Wall Street Journal , Eastern edition; New York, N.Y. [New York, N.Y]25 July 2017: B.1.

ABSTRACT (ENGLISH)

An unknown investor made a massive trade via the options market Friday, as the CBOE Volatility Index, the fear gauge that tracks investor expectations for equity volatility, fell to its lowest since December 1993. About one million options contracts changed hands on a bet that the CBOE volatility gauge, called VIX, will rise to 25 by

October. If he or she is correct, the investor could see a payout of about $265 million, according to...

FULL TEXT

One investor has bet on a powerful resurgence in market turbulence -- a wager that could net a profit of about $265 million if Wall Street's fear gauge more than doubles in the next three months.

An unknown investor made a massive trade via the options market Friday, as the CBOE Volatility Index, the fear gauge that tracks investor expectations for equity volatility, fell to its lowest since December 1993.

About one million options contracts changed hands on a bet that the CBOE volatility gauge, called VIX, will rise to

25 by October. That's a level the VIX hasn't reached since June 2016, when the U.K. surprised global markets by voting to exit from the European Union. The VIX finished at 9.43 on Monday. If he or she is correct, the investor could see a payout of about $265 million, according to Stefan Wintner, vice president who covers volatility strategies at the commodity-trading adviser Dunn Capital Management, which is based in Stuart, Fla.

In the three-legged trade, the investor bought about 260,000 calls, or bullish options, that expire in October with a strike price of 15, according to Trade Alert. The strike is the level at which the contracts can be exercised.

The investor also sold roughly the same number of October puts, or bearish contracts, with a strike of 12. On top of those two trades, the investor sold more than 500,000 calls expiring in October with a strike of 25.

He or she collected about $5 million on the contracts that were sold, according to a Trade Alert note. The calls with a strike price of 15 were bought at $1.45 each. The investor collected premiums on the puts and calls that were sold for 75 cents and 45 cents, respectively.

Should the prolonged calm that has dominated markets continue -- and the VIX stay at its recent lows the investor could get burned and lose about $60 million, according to Mr. Wintner, since he or she is essentially short the puts that were sold. The investor could also lose money if the VIX climbs far above 25, he said, because of the

500,000 calls that were sold.

"I've never seen anything bigger," said Mark Caffray, a managing director at PTR Inc., a floor broker at the Chicago

Board Options Exchange specializing in the VIX and S&P 500. "It's pretty aggressive, and very bullish on VIX."

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He added that the bet was particularly remarkable given where the VIX has been trading. The index has been below

10 for its longest stretch ever.

The VIX is a measure of expectations for market swings over the next 30 days and is based on options prices on the S&P 500 index. It tends to rise along with investor anxiety, as stocks fall.

October has historically been a more turbulent month for the stock market. The investor may expect volatility to pick up after the summer, an outlook shared by others in the market, according to Pravit Chintawongvanich, head of derivatives strategy at Macro Risk Advisors.

In the last year, the trader dubbed "50 Cent" by market watchers has been periodically scooping up bullish options on the VIX, paying a price of about 50 cents for each contract. It doesn't appear that trader is at work in this instance, said Mr. Chintawongvanich.

Credit: By Gunjan Banerji