Volatility Carry Trade

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.

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