posted on Feb, 22 2013 @ 11:27 AM
He doesn`t have to hit the 20 strike to be In The Money. What the trader did was buy way OTM (out of the money) Call options.
Options this far away from strike are dirt cheap, as they often expire worthless. So, for example, lets say if they meet the strike price of 20 in the
VIX, these options will be worth 100 each. There is a model for pricing the time value of OTM options, but I won`t get into it here...but lets just
say for argument that these options would price at about 5 bucks, being so far out of the money.
Today, VIX is at about 16 or so, and it looks like volatility is picking up...hitting 20 is almost a sure thing.
So those options that the trader bought for 5, are likely worth around 60 today. Not a bad return, huh