Many investors trade long calendar spreads as part of their arsenal of option trading strategies. A calendar option spread is created by the simultaneous buying of a call or put in a longer maturity (expiration date), and selling the same strike call or put, in a shorter dated expiration month, e.g. stock ABC: buying the February 50 calls and selling the November 50 calls on a 3-month calendar spread.
The standard risk disclosure with a long calendar spread is that risk is limited to the premium paid for the spread until the first (shortest) expiration date. After that first expiration day passes, the risk is the same as a long option. In standard options it would be extremely rare for a calendar spread to be able to be bought for a credit where the further out option costs less than the nearer term option. However, in the CBOE Volatility Index (VIX) contract this is not the case.
The VIX is actually a European-style cash settled option. Settlement of this contract is based on a complex formula found on the CBOE website. The unique characteristics of the VIX are extremely complex and the individual months do NOT necessarily have any relationship to each other. The options are priced off of a forward 30-day volatility curve. This means each month basically is priced off its own underlying. The November VIX is not priced off the cash index but rather the future value of 30-day implied volatility of the SPX for the specific morning of Wednesday, November 18.
The February VIX options contracts are priced on the future value of the 30-day implied volatility of the SPX on Wednesday morning February 17, 2010. This forward 30-day implied volatility is definitely not the same for these two dates! In fact, the November future volume is currently priced at 24.90%. The February future volume is priced at 27.30%. These two different levels are the actual underlying for those options. It is the same as if the options have totally different stocks that they were based on.
This is why OptionsHouse does not treat calendar spreads in the VIX as a spread at all. The margin requirements will be the same as if you are selling a naked option with no protection, because that is in fact what you are doing. Buying the Feb 25 puts and selling the November 25 puts for a credit is not really a spread and not considered a bargain!
Be forewarned about the unique, complex risks associated with the VIX option contract.
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