All You Need to Know: How to Trade VIX Combos

- Objective: To benefit from moderate bullishness in the VIX with limited downside risk.

1. Apr15:

• This indicates the expiration date of the options is April 15. All the options mentioned (+15 and -2x30) will expire on this date.

1. +15:

• This refers to a long call option with a strike price of 15.

• You have bought one call option at this strike price, giving you the right to buy the underlying at $15.

3. -2x30:

• This indicates you have sold two call options at a strike price of 30.

• The “2x” signifies you are short two contracts of the 30-strike call.

• Selling these call options obligates you to sell the underlying at $30 if the price exceeds that level.

• Position Type: This is a ratio call spread, where the trader buys one lower-strike call (15) and sells two higher-strike calls (30).

• Purpose:

- This strategy is usually employed to capitalize on a moderate rise in the underlying price.

- It reduces the cost of buying the lower-strike call by selling higher-strike calls, though it introduces unlimited risk if the price rises significantly past the sold strike (30 in this case).

• Risk:

- Profit is capped at the upper strike price (30). Beyond that, losses are unlimited because of the short two call options.

- Losses also occur if the underlying remains below the lower strike price (15), as the long call expires worthless.

If the VIX is at:

• 15 or below: You lose the premium paid for the long 15 call. The sold 30 calls expire worthless.

• Between 15 and 30: The long call gains value, but your profit is offset by the sold calls as the price approaches 30.

• Above 30: Losses accelerate because of the two short calls, and they can become substantial as there is no upper limit to the VIX.

- The use of varying strikes, such as +13.5 and +15, across different expirations can serve as a hedge against unexpected volatility shifts.

- Buy 13 Call, Sell 20 Call, Sell 16 Put

1. Objective:

- Designed to profit from a rise in the VIX index while keeping initial costs low.

- Capitalises on implied volatility skew, making it ideal for traders with a directional bias toward higher VIX levels.

- While the setup cost was approximately $0.80 in December, changing market conditions such as increased implied volatility could create scenarios where the net cost becomes negligible.

- A near-zero-cost structure is achievable when the premiums from the sold options (20 Call and 16 Put) offset the cost of the purchased 13 Call.

- At 16.7 VIX:

- Intrinsic Value: The 13 Call would be in the money, with a value of $16.7 - $13 = $3.70.

- The 16 Put and 20 Call would remain out of the money, incurring no losses or gains.

- Net P&L: $3.70 - $0.80 = $2.90 profit.

- Downside Risk: Losses arise if the VIX falls below 16, as the 16 Put would be assigned. Losses are capped below 13 due to the 13 Call.

- Upside Potential: Profits are capped above 20 because of the sold 20 Call.

- This strategy is often preferred because it avoids high margin requirements associated with outright futures positions. The premium structure ensures affordability while providing exposure to directional VIX movements.

​Although the cost of this setup was around $0.80 at the time, evolving market conditions may allow for zero-cost or near-zero-cost implementations. This makes it a highly flexible and accessible strategy for those looking to trade the VIX effectively. Stay tuned for deeper insights into market volatility strategies!