|VIX $14 Strike Long Call Option|
Back in August I entered into a bit of a different trade than I normally do. Leading up to that trade the markets had been ridiculously quiet throughout the summer months pushing volatility via the VIX index to very low levels.
At the time I thought it was a rather calculated bet that volatility would rise over the coming months. It was a convergence of several factors regarding the fundamentals, namely the valuations, of the stock market in general, interest rate hike fears, continued low or no growth from companies and of course the fun of a very heated election year. When you add all of those concerns that I had on top of the fact that volatility was at all-time lows, I felt there was decent risk/reward potential to betting on higher volatility.
On August 22nd I bought to open a 14 strike long call option on the VIX index for $4.40. The call option had an expiration date of November 16th. After commission and fees the total cost to enter this position came to $445.64.
Check out my original post with the full details of the purchase and my reasoning for entering this speculative position.
On Thursday, November 3rd I sold my long call option back on the market to close the position. I sold the call for $5.70 which produced proceeds of $564.36 after commission/fees.
The returns turned out pretty nicely for this trade.
|VIX November 2016 $14 Strike Long Call Option Profit/Loss|
Even better is that compound annual growth rate. When accounting for the time that the return was earned over it looks fantastic. That's a truly astounding 226.0% CAGR.
If only I could find a way to earn that kind of return on every investment. Just for fun and perspective $1 would grow to $1 M in just over 11.5 years at a 226.0% CAGR. Even more staggering is that $0.01 would only need about 15.5 years to turn into $1 M. Talk about the power of compounding!
Lessons from this trade
Overall I can't really complain about a 26% gain in just over 1 month and think those complaints would fall on deaf ears. Although I do have to say I'm a bit disappointed by the size of the gain. If you recall from my article detailing the trade I was expecting a larger gain with the potential, if things worked out right, of a double or triple of my money.
Well, things obviously didn't quite work out that well. From the day that I closed the position there was still almost 2 weeks left until expiration so there was still some time value left in the contract. However, that was going to get eaten away quickly day after day.
I also gave up some of the intrinsic value to lock in the gains. At the time that I closed the long call the value of the VIX was between 21-22. Although the value of the call based on my sale was 14 (strike price) + $5.70 (premium) = 19.70. That's a big spread in the underlying value of ~21 and the value of the call at 19.70.
If the expiration date was November 3rd then the proceeds would have settled at the closing price of the VIX, ~21, less the strike price. So the intrinsic value based on the value of the underlying was actually closer to 7.00 or $700.
There's still an opportunity for the VIX to continue even higher; however, time is running out. Especially since the VIX can make big moves in either direction relatively quickly. So I decided to close out my position and lock in the gain rather than holding out for possibly higher returns or even worse a profitable trade turning into a loss.
One of the big lessons from this trade is just how important your timing is which unfortunately is extremely difficult. While I still think the thesis for even higher volatility is there, if it happens after the expiration date for the contract it does me no good. Likewise, if volatility spikes early in the contract then you don't see quite as much follow through in the value of a call option that still has plenty of time value.
Would I do this trade again?
I'm a bit torn on whether I would execute this trade if the opportunity presents itself again in the future. Frankly it requires a lot more maintenance and constantly weighing whether it's time to close the position during the entire time that it's open. That's a lot of mental work to deal with.
Although I wouldn't completely rule it out if I saw a similar confluence of events that could spike volatility at the same time volatility is sitting at historically low levels. However, taking a bigger picture look at the trade I likely would not do this again.
So I'm happy to close the position at a solid profit especially since this was very much the most speculative trade that I've done.
I've updated my Option Summary page to reflect this change.
Have you ever ventured into a purely speculative short term trade? Did it work out well for you?
Please share your thoughts below!