Should you just buy VIX futures whenever it gets low?

C

CyJackX

However VIX is calculated, the lowest it gets is the 10-12 range. Why shouldn't you just buy a futures contract at this point and hold on when it eventually rises? Is it because of Margin interest?
 
The problem with this idea is the futures spread. When the VIX gets lower than historical norms, the back month futures tend to trade at a premium to the front month. So say the cash VIX is currently 11 and stays that way for awhile. The front month future may be trading at 13. You buy it and hold on to expiration, it will settle at the cash price of 11. You then buy the next months future at 13 again. So you will lose this premium until the VIX eventually rises. You can't buy the VIX cash price, you would need to buy the futures, or options (which are priced off the futures.)
 
Makes sense that the market players would trade until a low VIX play has even odds of being profitable. Forgot that the VIX futures could easily deviate from the index.
 
VIX futures could be trading at a different price than VIX since they are not tied together except at expiration. Also, as indicated above, the expiration you buy matters to be right otherwise you will lose money on the convergence decay to the spot price of VIX.
 
Like most futures there are 3 basic ways to predict VIX:

- "Value": Buy VIX when low, sell when high
- "Carry": As others have said you ideally want to be buying 2nd month VIX when it is cheaper than 1st month VIX. Most of the time it isn't and you should be short VIX.
- "Momentum": If VIX has been rising it will usually continue to do so.

Just using one of these won't give you the benefit of using all three. The first is also the weakest effect, and it tends to play out at longer time horizons (6 months to a year).

GAT
 
globalarbtrader said:
"Carry": As others have said you ideally want to be buying 2nd month VIX when it is cheaper than 1st month VIX. Most of the time it isn't and you should be short VIX.
More...

currently 2nd and 1st are in backwardation, so would you recommend to buy it now? look here: http://vixcentral.com

however: when you look at the chart of the vix futures of the last few months you see, that the roll yield is very high, that means you have to sell the cheaper contract and buy the much more expensive contract as stated above, and I guess you have to have good nerves to keep cool in a low volatility environment.
 

Attachments

  • vix.PNG
    vix.PNG
    17.8 KB · Views: 21
panthers01 said:
currently 2nd and 1st are in backwardation, so would you recommend to buy it now? look here: http://vixcentral.com

however: when you look at the chart of the vix futures of the last few months you see, that the roll yield is very high, that means you have to sell the cheaper contract and buy the much more expensive contract as stated above, and I guess you have to have good nerves to keep cool in a low volatility environment.
More...

Yes based purely on the carry I'd be long December VIX but short everything after January.

Taking all my signals into account I am maximum short in December VIX. I've started rolling to January which will be max short too so I wouldn't open a new long position in December now as the expiry is too close.

GAT
 
You must log in or register to reply here.
Back
Top