Thursday, June 11, 2009

7 points ITM / 6 days to go / 5 options

11-June-09

The market was up at opening, and the VIX was down as you would expect--fairly sharply at around 27. As is their practice, the VIX calls behaved sluggishly, not moving much--and as a result the premiums on the deep in the money calls became high--the bid IV was over 500! The 20 June calls, with 6 calendar days left on them had $100 of premium on bid with a spread of around .5 to .6, which is typical (the July calls had $300). I sold 5 June VIXFD 20 calls (at 8.0) and bought the June 40 calls (0.1) for a net credit of 7.90. I then bought 200 shares of VXX at 72.84 to hedge the position. The VIX/VXX ratio has been running at around .38 but it felt silly to buy 190 shares. The net debit on the position was 10618, not including commissions, and if the VXX hedge is perfect the profit at execution will be $450, or 4.2% (again, excluding commission). We will see how it goes.

I tried splitting the bid / asked spread with my option order and then dropped the credit by 0.1 intervals, but the offer didn't execute until I had dropped to within 0.1 of the bid offer on the ITM call. I didn't wait very long with each order, but I didn't get the feeling that they were going to bite.

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