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Why Long VIX Exposure Can Lose Value Through Futures Roll-Down

Article Quant Q&A · Author: JejeBelfort
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Summary

The document explains why buying volatility exposure after a quiet period is not a cost-free way to profit from a future volatility spike. VIX is a spot index rather than a security that investors can hold directly, so traded exposure is typically obtained through VIX futures or products tied to them.

When VIX futures trade above the spot index, a long futures position may lose value as the contract converges toward spot, creating negative roll-down. The reply says a VIX exchange-traded product does not remove this effect: it holds a changing mix of two futures contracts and rebalances their weights. A recent gain in such a product therefore does not establish that holding it indefinitely is profitable. The explanation is concise and does not quantify the impact of term structure, rebalancing, fees, or possible gains during volatility spikes.

Key ideas

  • VIX is a spot index and cannot itself be held as a security.
  • Long VIX exposure is commonly obtained through futures-linked products.
  • When futures are above spot, convergence can create negative roll-down for a long position.
  • A VIX exchange-traded product retains futures carry exposure while adjusting its contract weights.
  • A short-term gain does not show that buy-and-hold exposure will remain profitable.

Tags

VolatilityFuturesCarryDerivatives pricing
Full text
# Why not just be long VIX and wait for the next volatile period?


# Why not just be long VIX and wait for the next volatile period?












Over the past 3 months, VIX has been relatively low. Therefore, there seems to be a "free-lunch" here by just being long VIX, and wait for the next market turmoil (which is happening at the moment with the US-China trade war).

Of course I know that such an obvious free-lunch is not possible in the market, due to some constraints I am certainly missing.

I was told by a trader that it comes from the carry costs you have to pay for being long VIX. I am not really familiar with this carry cost notion for futures here, so it does not really help my understanding.

Besides, there is a VIX ETF (VXX) that I could just have bought and hold until today, and make a 20% return from April till now.

Can someone therefore explain:

- How carry costs work for VIX Futures?

- If carry costs apply to VIX ETF, where in the case they don't apply, there should be something else I am missing otherwise I would just be long the ETF.

## Answer by ExIR (score 8, accepted)

https://quant.stackexchange.com/a/45666

Put simply, VIX is a spot index (fair value to a variance swap on SPX of constant maturity) that you cannot own as a security. Market participants create futures for you to trade. Futures trade higher than the VIX -- if you long VIX futures, you lose when the futures contract converges to VIX. You therefore have a negative roll-down. VIX ETF doesn't avoid the issue at all, it blends two futures contracts and tries to rebalance the weights.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

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