Disclaimer: The information found on this site is meant for educational and informational purposes only. Nothing on this site should be construed as a recommendation or solicitation to buy or sell derivatives or securities or to trade any particular strategy. Trading of derivatives or securities has large potential risk and you must be aware of and accept all the risks. Past performance of any trading system or methodology is not necessarily indicative of future results. No representation is being made that any account will or is likely to achieve performance results similar to those discussed on this website. Hypothetical or simulated performance results have certain limitations and do not represent actual trading.
Thursday, July 18, 2013
VIX Futures 1st/3rd Month Spread Starting To Look Attractive
The above chart shows the median values of the VIX 1st/3rd month futures spread counting from 18 trading days to go before the expiration of the front month futures. As you can see in the red line, the median (average) level of the spread during the period 18 trading days to 9 trading days is about 1.80-2.00. Furthermore, I plotted the MAX values of the spread in blue and the MIN values of the spread in green. Basically, with VIX 1st/3rd futures spread trading at 2.38, there is 0.43 "edge" to sell that spread (buy Aug VIX futures, sell Oct VIX futures for credit of 2.38 or higher). Furthermore, August is an expiration month of VIX futures that is 24 trading days long, which means that there is an additional 1-week window where selling of the spread can work in your favor.
One would want to "sell" the VIX 1st/3rd month futures spread when one expects equity market volatility to rise. The spread would narrow usually because the front month futures would rise a greater amount than the third month futures would rise. Usually, VIX rises when the S&P500 Index declines. On the flip side, if equity market volatility was expected to fall (usually when the S&P500 Index rises), one would want to "buy" the VIX 1st/3rd month futures spread. Case in point, on June 21, 2013, when the S&P500 Index was falling, the VIX Jul/Sep month futures spread was trading as low as 0.35. On July 16, 2013, which was the last day of trading for the VIX July futures, that spread had risen to 3.20!
In looking at the chart of SPY, there is currently nothing in the charts or indicators that would make one doubt that this bullishness in SPY would not continue. However, both short-term and mid-term trend channels point to technical resistance at around the 170-171 level. Furthermore, SPY has come up pretty far, pretty quick. Even a 2% decline in SPY over the next 3 weeks could make VIX Aug/Oct futures spread fall to 1.95.
The pricing of the VIX Aug/Oct futures spread and the 3 week time period of window for even a mild correction in SPY makes selling of that spread a good risk/reward trade.