A. track front month VIX future price (let’s call it variable “J”)

B. search the front month’s VIX options chain for a straddle at strike price “K” for which Pk-Ck (that is, ATM call price minus ATM put price) equals J-K.

in simple words and from your example: the difference between 29 and 25 is 4, and the difference between 4.75 and 0.75 is also 4.

C. if conditions are met, simultaneously long the future and sell a synthetic contract (selling and buying P and C at the same strike so your total delta is 0).

am I correct so far? of course, you could reverse the order and short a future while buying the synthetic contract.

Now, to make the algorithm profitable, all one has to do is change sequence B to say:

B. B. search the front month’s VIX options chain for a straddle at strike price “K” for which Pk-Ck (that is, ATM call price minus ATM put price) IS LARGER than J-K. [Pk-Ck>J-K]

in simple words and from your example: the difference between 29 and 25 is 4, and the difference between 4.75 and 0.70 is also 0.5 which would leave you at a 0.5 profit.

Now my question is:

1. did I get it right?

2. how common is a profitable arbitrage situation on those products? I am, since the options are priced using Black-Scholes, it’s hard for me to imagine the difference between puts and cal prices will always be 0.. right? but if that;s the case – how come not every algo in the world is working on that?

thanks in advance

Johnny

]]>About 50% of options expire in-the-money and about 50% expire out-of-the money. Makes sense…just look at an option chain on any given day.

Do you consider an option that has expired in-the-money to be worthless?

The “80-90% of options expire worthless” saying assumes that all options that have depleted their time value are considered worthless.

]]>Thanks again.

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