Why VIX Futures Lose Value Between Rebalancing Dates
Summary
The document examines why a portfolio of VIX futures targeting a constant 30-day weighted average maturity can lose value despite the usual contango explanation for gains in inverse VIX products. The question is whether buying more of the higher-priced second-month contract offsets the front contract’s decline as the portfolio is rolled.
The accepted answer attributes the loss to both contracts declining in value during the interval before the portfolio is rebalanced. The periodic adjustment to restore the target maturity then locks in a small loss. The explanation distinguishes this effect from a loss caused simply by shifting weight toward a more expensive contract. It is a brief conceptual answer, with no derivation, data, or discussion of how the effect varies with market conditions or rebalancing frequency.
Key ideas
- A constant-maturity VIX futures portfolio must periodically adjust its holdings as contracts approach expiration.
- Both the first- and second-month futures can lose value between rebalancing dates.
- The explanation attributes the loss to price changes before rebalancing, rather than to buying the higher-priced second-month future.
- The answer offers a qualitative mechanism without a quantitative derivation or empirical evidence.
Tags
Full text
# XIV Positive Roll Yield # XIV Positive Roll Yield I understand that VIX futures are usually in contango and so a portfolio that holds futures with a weighted average expiration of 30 days will "roll" down to equal the VIX index at maturity. This is usually given as the reason why XIV makes money most of the time. But a portfolio that holds VIX futures with a weighted average expiration of 30 days has to keep adjusting its weightings as time passes, adding more weight to the 2nd future. This means that although the falling value of the front contract reduces this weighted average, the purchase of more 2nd month futures pushes up the weighted average. So are we saying that the loss from the fall in value in the first contract is greater than the gain in weighted average from moving into higher valued 2nd month options? ## Answer by trade_the_basis (score 2, accepted) https://quant.stackexchange.com/a/36716 I found the answer. The loss in value is due to the fact that the portfolio of 1st and 2nd month futures itself loses value before it is readjusted. So when the readjustment is made (at the end of the day or however frequently it happens) to maintain a 30-day weighted average, a very small (but not insignificant) amount of money is lost. It is not due to the fact that the 2nd month contract is more expensive, but rather due to the fact that both the 1st and 2nd month contracts lose value for the interval they are held for before each rebalancing.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.