← AdvancedLesson 5 · 3:35
You sold an option, then the curve flipped: what happens?
Summary
You can describe what a flip from contango to backwardation does to option sellers, and why the seller nearest to expiry is hit hardest compared with what they collected. You can explain why being forced to buy back at the top is what locks in the loss.
Key terms
- curve flip
- A change from contango to backwardation, where the near months jump the most.
- margin
- Money your broker holds against what a sold position could lose.
- locked-in loss
- A loss you keep because the trade was closed, even if prices later recover.
Check yourself
Answer each question to see why the right answer is right.
1. From 16 Jul to 5 Aug 2024, which part of the VIX futures curve rose the most?
2. Two sellers of a 20 delta XYZ put, and the stock never moves. One collected $53 with one month left, the other $167 with eight months left. After the flip, who lost the most compared with what they collected?
3. Why did the eight-month put lose only $123, less than it collected?
4. In this lesson, what is margin?
5. By 21 Aug 2024 the August future had fallen back to about 16. A seller's margin ran out on 5 Aug and the broker bought the put back. What happens to that seller's loss?
Finished the video and the quiz? .