Options Jive

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Getting Long Volatility with Covered Calls

Options Jive

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Volatility is a nuanced asset class, today we explore getting long volatility with Covered Calls. Tune in to hear Tom and Tony explain how to set these trades up and the pro’s and con’s that go along with them!

Some potential set ups for a covered call on volatility are:

  1. Buying 1 /VX Future and selling 10 VIX Calls

  2. Buying 100 VXX Shares and selling 1 VXX Call

  3. Synthetic Covered Call in the VIX

The VIX index is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. The VIX is determined through a numerical calculation. Futures on the VIX (/VX) are determined by what people think the VIX will be trading at in the future. Options are listed on the VIX but priced off of /VX. Due to this a 50 option on the VIX will not always be lined up with the spot VIX price. At Expiration /VX = VIX.

VXX is based on a portfolio of the nearest two VIX futures. When in contango (which is 88% of the time), a decay occurs. To profit from long VXX, the stock needs to increase quickly. Losses can be offset by a short call.

Be sure to tune in to hear Tom and Tony break down the pros and cons of trading covered calls on volatility!

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