Volatility Carry Trade is a futures trading strategy – the first non-equities strategy presented in this blog so far.
- Strategy on futures, key concepts: backwardation / contango
- Vega neutral volatility carry trading strategy (i.e. hedge against volatility)
- Two different futures contracts are traded: ST and LT; rolling futures on the S&P 500 VIX Index
- ST is the short term future and LT is the long term future
- If ST / LT > 1 then in backwardation so buy ST and sell LT
- If ST / LT < 1 then do a carry trade: sell ST and buy LT
Key terms explained below:
Backwardation: Futures contract is trading below the expected spot price.
Contango: Futures contract is trading above the expected spot price.
Vega neutral: Position that is not sensitive to volatility fluctuations.