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AnalyticalVega
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VIX Term Structure Trading

June 6th, 2013, 12:51 am

I have noticed recently that the long end of the VIX Skew curve has gotten very flat. According to VIX Central (http://vixcentral.com/) Oct 13/ Nov 13 has a percent contango of 1.83Nov 13/Dec 13 has percent contango of 0.77The VIX Time Spread for Oct13/Nov413 is selling for about 35 centsThe Strategy would be to sell Oct 13 (which has a higher IV) and buy Nov413. Wait for the spread to widen, mostly due to the front month losing value faster than the back month.This would normally happen if the curve maintains most of its basic structure (typically upward sloping with moderate steepness) The only problem is this is a not a defined risk trade, Backwardation in the VIX Term Structure typically happens after a sudden huge spike in IV and only at the short end of the curve. Yet strange things happen in markets and I don't want to take unlimited riskno matter how unlikely it is to occur.How would you limit your risk on this one in a way where you don't hedge away all of your potential profit?
 
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AnalyticalVega
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VIX Term Structure Trading

June 6th, 2013, 3:20 pm

 
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acastaldo
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VIX Term Structure Trading

June 6th, 2013, 10:24 pm

On the diagram the Dec future does appear to be low compared to the Nov and Jan.For example (today, June 6 2013)Nov-13 19.40Dec-13 19.55Jan-14 20.35The midpoint between Nov and Jan is 19.875, so the Dec appears to be "too low" by 0.325HOWEVER, this is a stable recurring pattern in the marketplace that is probably not exploitable.Go to the vixcentral.com Historical Prices tab and display the curve for June 6, 2012 exactly one year ago. You will see the same "anomaly" with Dec 2013 depressed compared to Nov and Jan. An the June 6, 2011 the same thing (though perhaps a little less). Try June 7, 2010.Experienced traders say the Dec Vix is always low. It is due to different trading days in different months and perhaps different rate of information arrival.
Last edited by acastaldo on June 6th, 2013, 10:00 pm, edited 1 time in total.
 
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AnalyticalVega
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VIX Term Structure Trading

June 7th, 2013, 3:39 pm

QuoteOriginally posted by: acastaldoOn the diagram the Dec future does appear to be low compared to the Nov and Jan.For example (today, June 6 2013)Nov-13 19.40Dec-13 19.55Jan-14 20.35The midpoint between Nov and Jan is 19.875, so the Dec appears to be "too low" by 0.325HOWEVER, this is a stable recurring pattern in the marketplace that is probably not exploitable.Go to the vixcentral.com Historical Prices tab and display the curve for June 6, 2012 exactly one year ago. You will see the same "anomaly" with Dec 2013 depressed compared to Nov and Jan. An the June 6, 2011 the same thing (though perhaps a little less). Try June 7, 2010.Experienced traders say the Dec Vix is always low. It is due to different trading days in different months and perhaps different rate of information arrival.June 7, 2010 is scary, most of the entire curve is inverted. with VIX very high at the short end (Flash Crash after effect) the curve structure at 6 months out is inverted. This is the scenario I need to hedge against.
 
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Alan
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VIX Term Structure Trading

June 9th, 2013, 12:41 pm

My first reaction was that a very low VIX Dec seasonal made perfect sense.After all, holidays, people go on vacation, etc.Then, I ran the numbers (avgs each month of the daily VIX, since 1990): Over 23 years, Dec looks quite 'average' (7 months have lower avg values, and 4 have higher). Who can confirm?
Last edited by Alan on June 8th, 2013, 10:00 pm, edited 1 time in total.
 
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AnalyticalVega
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VIX Term Structure Trading

June 9th, 2013, 8:07 pm

Personally I think seasonal trading is a loser..I much prefer trading on well established relationships that temporarily get out of whack. That is why I don't look at holidays, I look at the basic curve structure and try to detect anomalieswithin longstanding patterns.
 
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tagoma
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Re: VIX Term Structure Trading

March 12th, 2021, 1:18 pm

Trading Signals In VIX Futures

Did you friends read Avellameda et al.'s recent paper on VIX futures curve trading? What do you think, please?
 
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Alan
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Re: VIX Term Structure Trading

March 13th, 2021, 2:16 pm

I looked very briefly. The strategy being suggested was: in backwardation:  short the VIX 1M future and go long 2x the VIX 5M future. Then, there was some machine learning thing to optimize stuff. I didn't read that part. 

Regardless of the results of any historical study, there's no strict relationship between any two futures: they are different animals. Under "some" extreme vol event (not yet seen), your return on some trading day will be essentially -100% and you're done.