VIX Futures spread trading

VIX futures are usually in contango, meaning that the next month future is quoting at a higher price than the current month VIX future. But this spread in not constant, and at the end of the expiry cycle an interesting VIX future spread trading idea comes to my mind…

End of cycle VIX futures spread trading

Having a look at the chart below you hopefully see the spread trading idea by yourself:

VIX futures spread trading

VIX futures spread trading

The chart shows the rolling, non adjusted front month and 2nd month VIX future. (Reuters Eikon VXc1 / VXc2) The blue line underneath the chart is the absolute spread between those two data series. As VIX is in contango, this spread usually is negative. That’s also the reason for the bad long term performance of UVXY and other volatility ETFs.

I marked all the monthly expiry dates on the chart. As you can see the spread between the front month and the 2nd month significantly increases shortly before expiry. “Shortly” usually means 5 to 10 trading days prior to expiry of the front month VIX future.

The spread widens as the front month loses most of its time value over the last trading days. This is specific for VIX futures and usually can not be observed in such clarity with other futures.

To make some money with this VIX specific behaviour, one would buy the front month future about 1 week before expiry and hedge this position by selling the upcoming months VIX future. The total position has to be closed on expiry of the front month VIX future.

VIX spread trading strategy backtest

A quick and dirty back test of this trading idea reveals the possible potential of this strategy.

The chart shows the continuous front and back month VIX futures (VXc1 -red line ,VXc2 – barchart, + open interest)

As soon as the open interest in the back month gets higher than in the front month VIX future, the trade is initialised. Short front month, buy back month. The position is closed at the end of the expiration cycle of the front month future.

VIX future spread trading strategy backtest

VIX future spread trading strategy backtest

WARNING: Futures trading is not suited for everyone and there is no win without substantial risk! Kids, don’t try this at home! The long term back test shows some nasty behaviour!

Also have a look at another VIX trading idea, using the UVXY ETF. More on date based patterns in equity markets can be found in this article.

Charts thanks to tradesignal and Refinitiv data

3 thoughts on “VIX Futures spread trading

  1. This strategy looks brillant and pretty safe.
    Can you tell us more about the “nasty behavior” ?
    Thanks !

    • Thanks.
      Like with every spread strategy you got two legs, so two positions which can fuck up. You are basically relying on the fact that there is as much know on the near future, than there is on the further away future. But what if there is a known event after the expiration date of the first leg? The spread could get as wide as it likes, and your p/l would show some dramatic swings…
      In general spread strategies usually show fat tail behaviour…

      • Hi there, thx for this. Would it make sense to open positions only when the spread between the two is historically high (I.e. declining vix)?

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