Strategies · Library · Volatility
§7.2Carry
VIX futures basis trading
Compare the front VIX future with the VIX index. When the curve slopes up the future tends to drift down, and when it slopes down it tends to drift up, so the trade fades the basis.
- Asset class
- Volatility
- Held for
- Weeks
- Data
- ARCANE has part of the data
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Front-month future minus spot VIX, divided by business days to settlement (a daily roll value).
- Entry and exit
- Open short when the roll value is clearly positive, open long when clearly negative; close when it moves back toward zero.
- Sizing
- One futures position, optionally hedged with index futures.
How it fails
- Volatility spikes hit the short side hard
- Hedge ratio unstable
- Roll costs and margin
Data it needs
- VIX index
- front-month VIX futures
- days to settlement
- index futures
VIX index and ^VIX3M closes exist; VIX futures prices and settlement dates do not.
How ARCANE uses it
A sealed Call on VIX falling or rising could cite how steep ^VIX3M is against ^VIX as a stand-in for the basis.
Needs futures term structure and a short position; VIXY plus the ^VIX3M/^VIX ratio is only a rough long-only gate.
Filed under the carry card
Own what pays more than it costs to finance (the return if prices stand still) and sell what pays less, across currencies, bonds, commodities and stock indexes.
A paper plan from this card holds 21 to 252 days, stops at 2× the expected move and uses at most 75% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §7.2, p. 82 of the SSRN version. Described in our words. Carry is ARCANE’s filing, not the book’s.