Earlier today, I saw an interesting ratio spread in VIX options at the CBOE. The trade was the VIX Oct 20-17 1×2 Put Spread. Paper (hedge fund, retail bank, mutual fund or big trader) Sold 1000 VIX Oct 20 puts and bought 2000 Oct 17 strike puts for a $1.65 credit.
Let’s break down this trade.
P&L Outcomes on October Expiration (VIX Expiration is Wednesday morning, October 17th):
VIX settles in October Above 20: The trader profits the full credit he sold the spread for: $1.65 X 1000 times.
Vix Closes above 18.35: Trade will be Profitable
Breakeven #1: Vix Closes at 18.35
Vix Closes between $15.65-$18.35: Unprofitable
Breakeven #2: 15.65
VIX Closes between below 15.65: Profitable
Below is a chart of the VIX over the last ~90 days, showing where the VIX has been and the ranges where this trade would be profitable or a loser. It also shows where the two breakeven points are at expiration.
Andrew Keene email@example.com