The latest “I’m too chicken to put on this trade” trade idea

Speaking of VIX, look at the term structure of the futures, compared with the past couple months:

Backwardation??? Source: thinkorswim by TDAmeritrade.

Backwardation??? Source: thinkorswim by TDAmeritrade.

It’s well known that, in times of great stress, the VIX goes from contango to backwardation.  Once everything cools off (and I do believe things will cool off), the contango will return.

The trade: VIX calendar spread

  • Short Nov ’14 VIX future
  • Long Dec ’14 VIX future
  • Spread costs about 1.25 credit (that’s $1250 per spread) right now – when returning to backwardation, exiting the trade will be a credit as well.

Why I’m too chicken: if the fear has way further to run, there’s no end to the pain that can be suffered with this trade.  I stay plenty awake at night worrying about my other positions…

If anyone else puts this trade on, let me know how it goes!

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3 thoughts on “The latest “I’m too chicken to put on this trade” trade idea

  1. Have a look at the V2X. Last time I checked this also had a whacky strip shape. Perhaps a cross market trade makes sense? I don’t do this kind of relative value myself, but its certainly worth keeping an eye on these when deciding to roll futures.

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  2. Thanks Rob. Yep – I agree the forward curve helps in several areas.

    Anyone who put on the trade: I’d probably take this off now. The spread is now trading at $(0.05), so we’re back to contango (just a bit). Pocket the $50 credit/pair in closing, to make a $1300/pair profit before commissions.

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