Category: Implied Volatility

The Volatility Index (VIX), also widely known as “The Fear Index” has been gaining lot of popularity especially after the recent financial crisis. These days almost every major asset class has its corresponding VIX, and in fact several countries have introduced VIX equivalent for their leading market indices. After several months of trading it personally and refining selection criteria, I introduced VIX calendar spreads for OP Income Newsletter in 2009-10. Now this is almost one of the most regular income trade (assuming my selection criteria is met). We trade both VIX Cash Index as well as VIX futures and past performance trading record is absolutely fantastic.

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Trading VIX calendars is one of the most interesting play in the option’s world. And one needs to be careful before trading it as your risk may not the similar as in implied via regular calendar spread. You may lose more than the debit you pay for. And the key reason is that VIX options are priced based on VIX futures, not VIX cash index.

Equity long calendar spreads don’t require margin. Your cost is the debit you pay. However, VIX calendar spreads requires margins. One of the key things that I get asked time and time again about VIX calendars is how to calculate margin requirement for VIX calendar spreads and thus the idea behind this post.

In order to test margins I used ThinkorSwim to check their margin requirements. I used mid prices as of March 26th close. So here is how April/May calendar will look like-

• Sell to Open VIX April 16 Call and  Buy to Open VIX May 16 Call
• Total Buying Power Effect : $432.50 including $105 debit +Commissions
• Thus April/May cost: $432.50
• May/June costs $502.50
• Jun/Jul is costs $562.50
• Jul/Aug costs $600 and
• Aug/ Sept costs $645 including $45 debit;

Thus as you can see, the margin requirement change as you move from adjacent month to next and so on. IB shows $150 as margin requirement in pre-trade screen but actually the margin is shown once you confirm the trade. Here is what IB says about the VIX margin requirements –

Specific options with commodity-like behavior, such as VIX Index Options, have special spread rules and, consequently, may be required to meet higher margin requirements than a straightforward US equity option. Clients are urged to use the paper trading account to simulate an options spread in order to check the current margin on such spread.

There you go, “commodity like behavior”. Though pre-order screen of IB shows margin requirement as $150, you should check it once you are in the trade or do so via paper trading on IB software. I think it is inline with other brokers and as per exchange policy.

Thereafter I referred to CBOE website to see if I can find something, here is what CBOE states about VIX–

– Purchases of puts or calls with 9 months or less until expiration must be paid for in full.
– Writers of uncovered puts or calls must deposit / maintain 100% of the option proceeds* plus 15% of the aggregate contract value (current index level x $100) minus the amount by which the option is out-of-the-money, if any, subject to a minimum for calls of option proceeds* plus 10% of the aggregate contract value and a minimum for puts of option proceeds* plus 10% of the aggregate exercise price amount. (*For calculating maintenance margin, use option current market value instead of option proceeds.)
– Additional margin may be required pursuant to Exchange Rule 12.10.

Or to put this into a formula-

Index Options: Call Price + Maximum ((15% * Underlying Price – Out of the Money Amount),
(10% * Underlying Price))

Above explanation is for writing naked or uncovered. But one may argue, we have a long same strike option so I am covered like in equity options. This is where things get more interesting.

So here is my hypothesis about the VIX options, In case of VIX, most brokers’ treats short side of the calendar as a short call. And long position that you use for covering the risk, is considered as a long position. Thus usually the margin requirement will be Margin on Short side+ Cost of Long Side option.

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Another key thing to note, the margin requirement will change according to the price change in VIX. Let’s test the hypothesis (Prices as of March 26th close)-

• Margin required for shorting April 16 Naked call- $255.50 (as per ThinkorSwim)
• Option premium for April 16 Call- $72
• The asking price for Long May 16 call is $177
• Thus total cost of the spread for 1 Long April/May calendar is $255.50+$177= $432.50)

Is there a straight answer for you to calculate the margins? No, I haven’t found any. But the above does provide a reasonable idea on what kind of margins are required. For OP Income Newsletter, when I trade VIX calendars, I use roughly $500 as margin requirement per calendar.

So here are the key take ways-

1. Margins on VIX calendars are = Roughly $250 + Price of long Legged call, it’s NOT just the debit you pay for.
2. Higher-up the expiration cycle, higher the cost of long leg and thus higher cost of calendar spread.
3. The margin requirement will change depending upon VIX levels. It is never constant.
4. You can lose more in VIX calendar spread than the debit you paid for. ( I shall explain this in another post).

Hopefully, this clears some doubts on how VIX calendar margins are calculated. You may want to check with your respective brokers on how VIX margins are being calculated. If you have feedback or corrections about the post above, I shall be more than happy to correct and update.

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Profitable Trading, OP