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Lessons behind VIX margin changes

Chris McKhann (chris.mckhann@optionmonster.com)

The margin requirements on VIX futures spread positions have increased dramatically.

The initial margin on a futures spread--say, buying the September futures and selling those in July--was $625 up until last week. That has now gone up to $3,740.

Not surprisingly, a lot of people in an uproar about the increase. But my bigger issue is that this came out in a circular that was apparently noticed only by Bill Luby at VixAndMore.com , who brought it to my attention.

This may not have any effect on you or your trading, but it highlights some important issues of risk. Access to the VIX futures can be tricky regardless of margins, but their volume is more than adequate and they offer plenty of trading opportunities.

People are complaining that the new margin is too high, but I always thought the original margin was actually too low. For example, on June 20, the S&P 500 and its futures both fell 2.5 percent. If you had the aforementioned spread--long September VIX futures, short July--which is a popular structure, you would have lost $1,250. That is twice the initial margin on the position, and it wasn't even a huge move.

The margin on outright E-mini S&P 500 futures is $3,850, and that day you would have lost $1,800, less than half the margin.

So the lesson, regardless of whether you trade VIX futures, is this: Leverage can be lethal. If this change in margin had an impact on your trading or you got a margin call because of it, you are taking on too much risk. No one should be using their full margin, in trading futures or options.

(A version of this post appeared on InsideOptions Pro last week.)

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