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SurlyTrader is a portfolio manager at a large financial institution who specializes in trading derivatives. He has been in the financial services industry for over a decade and would like to share his experience and enthusiasm in the financial markets with those who have a natural curiosity and... More
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  • Trading the VIX/Futures Gap 1 comment
    Jul 20, 2010 9:17 PM | about stocks: VXX, VXZ

     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.



    Disclosure: Short VXZ
    Stocks: VXX, VXZ
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  • Mistrofan
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    Comments (395) | Send Message
     
    Don't go long on VXX - you will burn your fingers.
    20 Jul 2010, 11:42 PM Reply Like
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