VIX futures

Discussion in 'Trading' started by kalasend, Aug 7, 2011.

  1. kalasend



    Does anybody here trade VIX futures regularly?

    If you do, I have a few questions for you:
    - do you use them as hedges (against ES, or VIX options)?
    - do you short far month contracts at calm days(ie. gain from the steep contango)?
  2. saltmine


    I make volatility trades, but the instrument I use depends on the current market conditions. The curve for VIX futures is currently in very steep backwardation, which has usually been the case with previous VIX spikes.

    In order to profit from a contango condition directly with futures contracts, the slope of the price curve needs to change between the months you're trading. Define the front month as M0, the first month out as M1 and second month out as M2. If a profitable contango condition existed, you would actually buy the far month, M2, and short M1. Your expected profit, if the shape of the curve did not change over the next month, would be... (M1-M0) - (M2-M1).

    I prefer to use ETFs to exploit the futures curve instead. When the VIX is low and contango conditions exist I've simply shorted an ETF that purchases near term futures contracts, i.e. VXX. Let them pay to roll all the contracts and profit from the decay.

    With the current volatility spike, I have entered a short trade with VXZ instead. This ETF trades VIX futures between 4 and 7 months out with a rotating, daily roll. My thinking was that the VIX will eventually come down, but the current backwardation conditions will invoke a 20% one-month loss on a short trade with near term contracts. The roll yield is much flatter at the far end of the curve. Any insights would be appreciated.
  3. kalasend


    I am interested in VXX and VXZ pair trade, as described here
    And I am exploring to do the similar with futures, which of course comes with higher leverage.