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.
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.