Despite a jittery equity market, the VIX has fallen towards the lower end of its 3 month range. Unfortunately for those trying to capitalize on a falling (uninvestable) VIX index, the tradable VIX futures do not seem to care what the more widely watched VIX index does. The front month VIX futures contract closed at 28.5 while the VIX closed at 23.93. That leaves a spread of 4.57. Since the inception of these futures contracts, that gap has never gotten wider than 5.23 which occurred on July 14, 2009.
4.57 is on the upper edge of the VIX/VIX Futures gap
So how do you actually trade the closing of this gap? Go long one month ATM calls and puts, delta hedge that position and short the equivalent vega position in the front month futures contract. As with all trades, the only place where you will find a perfect hedge is in a Japanese garden.
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I thought the VIX options are settled based on the futures, not the spot?
Btw, I really enjoy reading your posts on volatility. Keep them coming!
Please explain what instrument are you talking about going long on the ATM calls and puts.Did you mean option on the futures month ?
Thanks
Sid
I was suggesting that you would purchase options on the S&P 500 and delta hedge those options to try to replicate the VIX index while shorting VIX futures. I am glad you have enjoyed the articles