Thursday, September 5, 2013

How a $50,000 Bet on a VIX Spike Could Pay $27 Million in Two Weeks

Does someone know something or do we just have a high stakes gambler in the house?

Tom Berris writes at MarketWatch:
Russell Rhoads blogs Thursday at CBOE Options Hub that traders are still abuzz over a position taken earlier this week. The “1 by 8 Call Backspread” cost $50,000 to put on but won’t pay off unless the VIX shoots above 28.43 by Sept. 17.
The VIX VIX -0.69%, affectionately known as the “fear index,” is in the midteens at the moment.
However, if volatility increases sharply — say, from U.S. military action in Syria  or Congress’s refusing to raise the debt limit — the trade pays off big time, adding $175,000 for each 0.01-point gain in the index above the break-even point.
If the VIX hits 30 before the options expire, the trader will be up more than $27 million.
The VIX’s 52-week high is 23.23. It last traded above 30 in late 2011.
BTW: At the EPJ Daily Alert, I have been recommending buying VIX  with a longer term time horizon.

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