Trading VIX Futures Basis with an S&P 500 Hedge

Summary

The document explains a strategy that trades the VIX futures basis and hedges broad equity exposure with E-mini S&P 500 futures. It interprets the basis as a volatility risk premium: the cited research finds it forecasts futures returns, even though it does not significantly forecast changes in spot VIX. The proposed rules sell the nearest eligible VIX future in contango and buy it in backwardation, subject to daily-roll thresholds, then hold the position for five trading days.

The hedge ratio comes from regressions relating VIX futures price changes to S&P futures returns, including an interaction with time to VIX contract settlement. The source study reports profitable results that it describes as robust to transaction costs, out-of-sample hedge forecasts, and risk controls. The page gives no full performance table or detailed implementation choices, and its hedge is partial: long VIX positions may help in equity crises, while short volatility positions are unsuitable for that purpose. Results from the cited historical study do not guarantee future performance.

Key ideas

• The strategy uses contango and backwardation in VIX futures to choose short or long exposure.
• It filters entries using daily-roll thresholds and holds positions for five trading days.
• E-mini S&P 500 futures hedge the strategy’s exposure to changes in equity markets.
• The cited paper reports that the basis forecasts VIX futures returns rather than spot VIX changes.
• Only the long VIX side may serve as a partial equity-crisis hedge.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.