Beta of VIX Futures to VIX Spot

VIX Futures are the most direct way to trade the VIX. However, the price of the front month future will hardly track the VIX one-to-one. Thus it is important to estimate the sensitivity (beta) of the futures versus the index so that we can have some gauge of how our futures position might change in relation to the index.

The chart below shows that the front month futures (VF1) can be quite different from the VIX spot index.

Note that as VIX spot index gets higher, it is more likely that the VF is in backwardation. This is intuitive as at higher levels, it's much more likely that the VIX recedes back to some normalized lower level by settlement date.

Contango vs Days to Expiry

First thing to note is that VF is most of the time in contango, and up to 30% premium. The contango ratio here is simply VF/VIX such that a reading of 1.3 means the VF is 1.3 times the value of VIX.

Second thing to note is the decay of contango - looking at how the cluster of 5-10 DTE decays the fastest as it goes to the 1-2 cluster, compared to the decays of the other clusters. This means that the decay rate is fastest when the DTE is less than 10 days - something to note if you're selling volatility.

Estimating beta

Beta can be measured in many ways. Here we use daily changes in the front month future (VF1) over the VIX index, expressed as a ratio.

We should expect that as the days to expiry decreases, the VF will track the VIX more closely. This is because VF is essentially a bet on what the VIX will settle at the VF expiry date. As expiry gets closer, market participants have narrower ranges for their predictions.

We are able to see from the chart below that the median beta gets closer to 1 as the days to expiry goes down. The betas are however very noisy and it might be useful to use other ways to measure beta, perhaps using intraday data.

 

 

 

 

 

 

Volatility Strategies (B) – VIX Futures

This is part of a 5-part series of various execution styles for volatility strategies - full list here.

(B) VIX Futures

VIX and VIX Futures (front month), contango values in red and expressed as a percentage in blue

VIX Futures are the most direct way to express a view on VIX, but for those new to it, the danger lies in not understanding what it is and how the prices move, as it does not function like a normal stock.

For a surface understanding of what VIX Futures are, you can head here. This post is for how to go long/short the VIX using VIX Futures.

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Volatility Strategies Cheat Sheet

Volatility Strategies Cheat Sheet

Volatility strategies are categorized into 4 major views and 5 different expressions / strategies.

  1. Tactical Long Volatility: Short term trading view for when volatility / VIX is low and you expect it to increase
  2. Tactical Short Volatility: Short term trading view for when volatility / VIX is high (e.g. after a volatility spike) and you expect it to decrease
  3. Strategic Long Volatility: Permanently long volatility
  4. Strategic Short Volatility: Permanently short volatility
Links to detailed strategies:

(A) Options on S&P
(B) VIX Futures
(C) VIX Options
(D) Volatility ETFs
(E) Options on Volatility ETF

 

Volatility Strategies (A) – Options on S&P

This is part of a 5-part series of various execution styles for volatility strategies - full list here.

(A) Options on S&P500 index

This is an indirect way to bet on the value of VIX, but it is in fact where VIX gets its index value from. You can't however perfectly replicate VIX. Options on the S&P gives you the ability to express a view on both volatility and on equity markets.

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How SVXY works

SVXY (ProShares Short VIX Short-Term Futures ETF) is one of the more intuitive ways to make directional calls on volatility or the VIX.

For most part, it moves up when volatility is tame or decreasing, so it can be thought of as investing in market calmness. It crashes when there are market panics. If you think that sounds a lot like the stock market, you are right. SVXY is highly correlated to stocks (S&P 500 to be precise), yet somewhat different.

Skip to the end if you just wish to trade it without the boring details.

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