Playing the Expiry for May 18: CBOE Volatility

The CBOE Market Volatility Index [VIX:INDX], also known as the VIX, is a market tool to calculate risk and volatility in the market. Unlike regular equity options, VIX options expire 30 days before the following month's regular options expiry. This typically means the VIX and many other index options that follow this rule expire on a Wednesday. The VIX is an AM settled product, which means the index value is calculated using the opening price on Wednesday. Therefore, all positions must be entered before the close of Tuesday.

The VIX is roughly valued at 18.40. The VIX has not had substantial volatility in the past few weeks, with exception to a large spike in March. Consider writing out-of-the-money call or put options. There is still substantial value for one day. The 20 strike, about 1.60 out-of-the-money, still holds 20 cents per contract. The 21 strike is currently bidding 10 cents.

VIX options may require larger account equity. Index options are settled by cash, not by an underlying asset, like a stock. However, one major advantage with index options are the low margin requirements. 20 contracts will require no more than $3,000 margin, but writing 20 contracts on a similarly priced stock would require as much as four times the margin. This does not mean firms deem index options less risky, it's just that the requirement for trading is smaller, so ensure you fully understand the potential consequences of larger contract sizes.

Disclaimer: Writing uncovered (or naked) options requires substantial margin and is only available to sophisticated traders. Uncovered calls have unlimited risk and can have infinite losses. Before making any trade, always discuss this with your advisor or professional broker.