My strategy

Guide

Characteristics of contango

My trade utilise the characteristics of VIX contango. Typical curve and monthly number are like this. It’s a data of Dec. 31st, 2021.

I use monthly maturity only, matrix table and term structure curve are like this.

As we can see, under contango, the difference of 2 months next to each other is changing from small to big.

In this example, JAN-FEB (2.30) > FEB-MAR (1.50) > MAR-APR (1.22) > APR-MAY (0.56) > MAY-JUN (0.32)

This is the one of (and typical) characteristics contango has.

1m, 2m and 5m

Once we know this characteristic, use it to make profit. The tools is calendar spreads. 1m means 1 month difference, 2m means 2 months, 5m is 5 months.

The basic rule of trade is that buy low then sell high, right? So, I buy MAY-JUN with $0.32 as 1m then wait for MAY expire date. Because of the contango, I can expect this $0.32 will be higher like $2.30.

Also buy APR-JUN with $0.88 as 2m and wait for APR expire date. My expectation is getting higher like $3.79.

5m is shorter than a month duration. Buy JAN-JUN with $5.89 then sell it just before JAN maturity date with higher price.

The price tracking data is following that I’m putting in daily log.

When the position close?

Ideally, keep the position untill maturity day so that I can expect max profit.

However, life is not so simple. These days, maximum of 1m is about 1.5 pts to 2.0 pts. I have another target points for 2m and 5m, also. So, I check each numbers everyday and I close the positions if they reached to these target points.

One more thing. After position opened, it may go backwardation. Most cases it happens, tracking chart may dive into negative area. It can be a good opportunity for adding the position becuse it returns to the positive (means contango) soon or later.

Believe the power of contango!

Option premium not cared

Usually, option trading need to consider option premium or time value. But my strategy does not. So, the strike prices I use has minimum (almost zero) time value in the premium.

OK, this is my VIX trade strategy. Again, this is just for my idea, not intend you to follow that. I don’t take any responsivirity even you make huge profit or lost.