Protection

[Grieve]

Are those clowns crazy enough to let us go over the cliff? Hopefully not, but I'm buying VXX calls (bet the VIX volatility index will spike) just in case.

I'm thinking Oct 25th weeklies, at 17 or so....

[Vanraw]

The volatility bet is a good one. Ive never played it. Im disappointed in TZA, in that the dow has dropped almost 700 points, and the russel 2k, has not. Almost like people were running from the big guys to the small to medium businesses.

Based on recent history, do you think the debt ceiling will not go to the last moment?

[Grieve]

I don't *think* we will actually go over, but it's very hard to say for sure.

I just bought the oct 25 calls. Technically we won't default until the end of the month (when the next interest payment is due), so I'm hedging against gamesmanship lasting almost until then.

The VIX is at 17 right now. It hit 80 in 2008...

[Breand]

OK, so I have never messed with options and I'd really like to start getting into them. I have a lil bit of floating cash in my account. Here is how my potential order looks:

Order Details Account 0002789845 - IND
Action Buy Call to Open
Option VXX OCT 19 2013 17.00 CALL
Deliverable
100 shares of VXX per contract
Expiration Date 10/19/2013
Number of Contracts 1
Order Type Market
Quote Last: $0.41Bid: $0.43Ask: $0.44 Real-time: 10/04/2013 11:00:00 AM ET
Order Costs Estimated Cost $44.00Explain calculation
Base Commission $6.95
Contract Charge $0.75 ($0.75 per contract)
Estimated Total Cost $51.70

So...this looks correct for a call option? And the goal would be anything over $17 before Oct 19th could be sold at a profit?

[Grieve]

Yes, or you could sell before expiration if it spikes up.

Buying a single option is a little expensive due to the fees. But if we spike to 30 you'll be very happy.

[Breand]

And if Oct 19th passes and I havent sold, I lose the money I spent on the contracts?

[Grieve]

If Oct 19th passes and you haven't sold, then:

a) If VXX is under $17, your contract expires worthless
b) If VXX is over $17, your call will trigger, and you will automatically buy 100 shares of VXX for $17 each. So you'd better make sure you have $1700 in your account. Or suitable margin. Or better still, just sell the call before expiration.

[Breand]

Well, I didn't pull the trigger and today VXX is up 5% and the contract price is now 50% higher *grumble**grumble*

[Breand]

Account 0002789845 - IND
Action Buy Call to Open
Option VXX OCT 19 2013 17.00 CALL
Deliverable
100 shares of VXX per contract
Expiration Date 10/19/2013
Number of Contracts 6
Order Type Market
Quote Last: $0.62Bid: $0.62Ask: $0.63 Real-time: 10/07/2013 12:01:52 PM ET
Order Costs Estimated Cost $378.00Explain calculation
Base Commission $6.95
Contract Charge $4.50 ($0.75 per contract)
Estimated Total Cost $389.45


So walk me through the math here: This represents the option to purchase 600 shares of VXX before Oct 19th at a cost of $389.45

Anything over $17 a share = profit - $389.45? So I need the value of each share to hit $17.65 just to break even?

[Grieve]

You are spending $389.45 to buy 6 $17 call contracts at $62 each. The price is given at 0.62, but you multiple that by 100.

If you choose to execute those calls, you would have to buy 600 shares of VXX at ($17 times 600 = $10,200. If at that time VXX was selling at $20 a share, you'd have an instant paper profit of $1800.

More realistically, if VXX jumped to $20 next week, your 0.62 calls would likely be worth 4.00 or more. So you could just sell your calls for ($400 times 6 =) $2400, or a $2010.65 profit. So you never need to actual buy any shares.

Just bear in mind that if there is a deal (or even if things just look more positive), the ViX could fall and leave your calls all but worthless. You shouldn't use money you can't afford to lose.

Last year when Apple was at $700, I had call options worth tens of thousands in paper profit. Then as the stock price plummeted, it all disappeard. Options are not for the faint of heart.

[Breand]

Ahh so you could sell either the actual shares, or the calls themselves...neat.

VXX up 7.5% today

[Breand]

You are spending $389.45 to buy 6 $17 call contracts at $62 each. The price is given at 0.62, but you multiple that by 100.

If you choose to execute those calls, you would have to buy 600 shares of VXX at ($17 times 600 = $10,200. If at that time VXX was selling at $20 a share, you'd have an instant paper profit of $1800.

More realistically, if VXX jumped to $20 next week, your 0.62 calls would likely be worth 4.00 or more. So you could just sell your calls for ($400 times 6 =) $2400, or a $2010.65 profit. So you never need to actual buy any shares.

Just bear in mind that if there is a deal (or even if things just look more positive), the ViX could fall and leave your calls all but worthless. You shouldn't use money you can't afford to lose.

Last year when Apple was at $700, I had call options worth tens of thousands in paper profit. Then as the stock price plummeted, it all disappeard. Options are not for the faint of heart.

So the real play here is to sell the calls, correct? Because otherwise I'd need to come up with 10.2k to actually purchase the shares, even though I could instantly sell them at a profit?

[Grieve]

Yeah, I always sell the calls before expiration (unless they are worthless). There was one time I somehow forgot, though, and almost had a heart attack when I saw I my account had a $60k margin debit. It may vary by broker, but eTrade just bought the 100 Apple shares for me on margin, even though I didn't have any cash reserves.

I'm up 50% on my VXX calls now...hoping for some more volatility this week.

[Breand]

I chickened out and did a straight up purchase.

I have to say, this investment seems like a sure thing if you go long in it. At some point there will always be a volatility spike and it is a very low purchase point right now.

[Grieve]

Yes, it's good insurance to have.

My calls are up 114% now, which is offsetting my losses elsewhere, so it's doing its job.

[Grieve]

Just bear in mind that if there is a deal (or even if things just look more positive), the ViX could fall and leave your calls all but worthless. You shouldn't use money you can't afford to lose.

I rest my case. . First sniff of a short term comprise (6 week debt ceiling raise), and the VIX has dived from 21.34 to 16.63...

[Breand]

yeah. Well, I did a straight purchase so it's at least something I can sit on and wait for the next crisis.

[Vanraw]

The problem with this type of fund as well as ETF's like TZA / TNA is that the leak. TZA price point when the dow was 14.8k was much higher than it is now. Same goes in the opposite direction.