Hi all,Looking at a trading strategy based on the VIX index, what would the best way to execute that strategy? I looked at the VIX futures but their volatility and correlation do not match that of the VIX spot. I would prefer using varswaps instead because of the thighter spreads and liquidity.Would 1M/3M varswaps do the trick instead, looking at the correlation and volatility of the VIX index and the varswap? I do not have any varswap data to compare short dated varswaps with the VIX index.Thanks in advance,RegardsRS

I sat on a presentation for variance swaps by Morgan Stanley last week. I might be able to give you a tip or two, but I'm not 100% certain what you are after. You can't make a strategy for trading on an index, only for trading products that exist. If you think you can forecast the VIX and want to trade based on that forecast, then I think that you could use variance swaps, although I'm surprised that futures don't serve your purpose here. In the meeting the presenter did mention that it is rare to do very short variance swaps such as 1month. I think there is some replication risk on their side at short horizons.

Thanks for your tips. What I want is a vega position that moves with the same vol as the VIX index, there is the varswap or an ATM straddle with delta/gamma hedging. It is hard to get my hands on OTC varswap data to test this if it has the same vol. We are talking about roughly 85% long term vol here. I noticed that the futures traded on the CBOE do not have the same vol as the VIX.

The bid-ask spread will be tough to beat on variance swaps. A varswap is definitely a pure vega play and would be easier than a straddle. I don't know if banks are likely to give you the historical data, but it doesn't hurt to ask. The Morgan Stanley presenation on variance swaps would be very helpful for you if you can get your hands on it somehow.