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Opportunity in VIX Futures

I have been watching this for the last few days, but there seems to be a great opportunity in VIX futures.  The futures curve is dramatically misshaped:

Interesting shape for a futures curve...

The markets are pricing in dramatically higher premium for September, October and November VIX futures than for December.  This is most likely due to historically high volatility in September and October, but I find it rather ridiculous.   I think a lot of the mis-pricing has to do with the demand created from the VXZ exchange traded note which purchases futures on that part of the curve.   I would tend to love selling a contract of October at 35.50 and buying a contract of November or even December at much lower prices.  The position is mostly self-hedged and should make money as the curve flattens out.

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5 Responses

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  1. Neeraj says

    How will you trade it? Could you pls share a specific trade example that you may set-up with this information?

  2. frank says

    for what it’s worth, i trade the vix curve for a living. one way to trade it is to go long a strong month and short a weak month. to determine that it takes much experience. nonetheless one needs to be correct on on market direction even when edge presents itself to the vix futures trader. i do not recommend people simply taking a swing, losses in these can be huge. one of my trade’s currently is short september long octocber; but i have positions in each month and you must know when to exit also.
    i promise anyone who takes a vix trade without any experience will get burned bad. these do not trade in a linear fashion.

  3. SurlyTrader says

    As with all trades, if you cannot quantify how much you could potentially lose on a trade because you do not understand the risks and/or you do not have loss parameters, then you should absolutely not place the trade. VIX futures are very illiquid at times and can have massive and persistent swings and I did not mean to imply that this was a sure thing without any risk. I could have worded that better, but just wanted a quick post showing the large difference between October and December. That being said, a full disclaimer cannot be put on every risk in this world, otherwise we would never be able to get an idea across.

    As a VIX futures trader, it would be great if you could relay some of your ideas to the readers. I would be more than happy to post articles from you.

    Everyone, please read the disclaimer on the site. None of the content is to be viewed as trade recommendations or financial advice.

    Best Regards,

  4. frank says

    sorry for coming on so strong. i do love these and study the curved 24/7. i’ve been wrong many times, but seem to come out very well 3 years in on these. you are correct imo, when you see prices so far out from normal historical patterns, edge can be there. spot vix levels in relation to near months matter, and the direction of the market can nullify any edge if the market goes strongly contrary to your bias. what i have found with these is even if you are not correct in market bias and you do have a short front month long back you can still earn as long as vol comes off at some point before you close the position. some people who i know have traded these simply close their position for a big loss while i stubbornly have kept them on and poof, vix comes in slightly and i now have a winner. only thing i can say is; someone should watch the movements for 6 months and really track actual spreads with spot vix recorded, that may help.

  5. ~ says

    Hello Surlytrader! Maybe you or Frank can explain this interesting pattern: usually VIX spot, and front month futures move more than the back month, however last week the opposite happened – VIX rose by 1.6 points, front month was up 2.3, but Feb-11 (latest listed contract) was up 3.9 points. Does such a volatile rise in the back month have economic significance?

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