VIX Futures Calendar Spreads: A Relative Value Strategy

Introduction to VIX Futures Calendar Spreads

VIX futures calendar spreads are a relative value strategy that involves simultaneously buying and selling VIX futures contracts with different expiration dates. Unlike an outright long or short position in a single VIX future, a calendar spread is a bet on the changing shape of the VIX futures term structure. This makes it a more nuanced and potentially less risky way to trade volatility. The goal of a calendar spread is to profit from the widening or narrowing of the spread between the two futures contracts.

The Mechanics of a VIX Calendar Spread

A VIX calendar spread can be either a long spread or a short spread. A long calendar spread involves buying a longer-dated VIX future and selling a shorter-dated VIX future. This position profits if the term structure steepens, meaning the price of the longer-dated future increases relative to the shorter-dated future. A short calendar spread is the opposite: selling a longer-dated VIX future and buying a shorter-dated VIX future. This position profits if the term structure flattens or inverts.

Payoff Calculation for a VIX Calendar Spread

The profit or loss on a VIX calendar spread is determined by the change in the spread between the two futures contracts. The formula for calculating the payoff is:

Payoff = (Change in Long Futures Price - Change in Short Futures Price) * Contract Multiplier

Payoff = (Change in Long Futures Price - Change in Short Futures Price) * Contract Multiplier

For example, if a trader buys a June VIX future at 20 and sells a March VIX future at 18, and at expiration the June future is at 22 and the March future is at 21, the payoff would be ((22-20) - (21-18)) * $1000 = ($2 - $3) * $1000 = -$1000.

VIX Calendar Spread Example

The following table shows a hypothetical example of a long VIX calendar spread in a contango market.

Data is hypothetical and for illustrative purposes only.

Actionable Strategies with VIX Calendar Spreads

VIX calendar spreads can be used to express a variety of views on the future of volatility. A trader who expects the VIX term structure to steepen, perhaps due to a period of market calm, could implement a long calendar spread. This strategy would profit from the roll-down of the short front-month future, while the long back-month future would provide some protection against a sudden spike in volatility. Conversely, a trader who expects the term structure to flatten or invert, perhaps due to an impending market event, could implement a short calendar spread. This strategy would profit from the front-month future rising more than the back-month future. As with all volatility strategies, a deep understanding of the factors that drive the shape of the VIX term structure is essential for success.