Latest / The Day Trading Podcast with Fexingo: Active Trading, Charts, and Short-Term Market Strategy / How Day Traders Are Using Kalshi Perps to Hedge Volatility
Transcript
- Lucas: So Kalshi's perpetual futures product crossed one billion dollars in volume within a week of launch. That is a staggering number for a platform that until recently was just event contracts. Luna: One billion in a week — and the VIX is up thirty percent over the same five-day period. That timing is not a coincidence, is it? Lucas: It is absolutely not a coincidence. The VIX jumped from around fifteen to above twenty in the last five sessions. The VVIX — the volatility of volatility — is up nearly three percent to ninety-six. Traders are scrambling for hedges and Kalshi perps are filling a gap that traditional VIX futures and options leave open. Luna: Which gap exactly? Because we already have VIX futures, VIX options, VIX ETFs. What's missing? Lucas: The gap is around continuous exposure without roll cost and the ability to trade volatility of volatility in a more capital-efficient way. VIX futures have that built-in roll yield — you're constantly paying or earning the contango or backwardation. Kalshi perps use a funding rate mechanism similar to crypto perpetual swaps. Every eight hours there's a payment between longs and shorts based on the difference between the perp price and the underlying index. Luna: So the roll cost is replaced by funding. But for a day trader, that funding is predictable and you can factor it into your hold time. Lucas: Exactly. If you're holding a VIX futures position overnight, you're exposed to the front-month roll. With Kalshi perps, you pay or receive funding every eight hours, which you can see in advance. That makes short-term volatility plays much cleaner. Let's take a concrete example from this week: the VIX went from fifteen to twenty. If you bought a Kalshi perp on the VIX at fifteen and sold it at twenty, you captured that move without worrying about futures expiration or ETF decay. Luna: But the funding rate would have been negative during a VIX spike, right? Because longs pay shorts when the perp is above the spot. Lucas: Correct. During a sharp VIX spike, the perp typically trades at a premium to the VIX spot because leverage buyers pile in. That means long positions pay funding. In this case, the funding over five days might have eaten a few percent of your gain. But the move from fifteen to twenty is a thirty-three percent increase. Even after funding, you're still looking at a very substantial profit. Luna: And for a day trade, you're not holding through eight-hour funding cycles anyway. You can enter and exit within a single cycle and avoid funding altogether. Lucas: That's the key insight for day traders. You can use Kalshi perps as an intraday volatility proxy. When you see the VIX term structure steepen or the VVIX diverge from the VIX — which is exactly what's happening right now, with VVIX up only three percent while VIX is up thirty percent — you can use perps to position for a catch-up move in vol of vol. Luna: Wait, VVIX is barely up while VIX surged. That suggests options markets are pricing in an expectation that the VIX spike is temporary. That's actually a signal for a mean reversion trade. Lucas: It could be. But it could also be that the VVIX is lagging because the skew trade is crowded. Either way, Kalshi perps give you a vehicle to express that view without the complexity of VIX options spreads. And the leverage is built in — Kalshi allows up to ten times leverage on perps, though I'd caution anyone against using full leverage on a volatility product where funding can swing. Luna: So the trader who thinks the VIX spike is overdone can short the VIX perp, collect funding if it stays in contango, and cover when the VIX drops. That's essentially a short volatility trade with a positive carry. Lucas: Precisely. And it's a trade that was hard to execute before Kalshi perps. Shorting VIX futures requires margin and the roll can be unpredictable. Shorting VIX options involves gamma risk. The perp is a cleaner expression. Now, Kalshi is not just about VIX. They also have perps on bitcoin, on event contracts like Fed rate decisions. But the VIX perp is the one drawing the most volume right now, and for good reason. Luna: And I imagine the one billion in volume includes a lot of institutional flow as well as retail. The liquidity seems real. Lucas: The order book depth has been surprising. In the first few days there were spreads of a few ticks on the VIX perp. By the end of the first week, the spread narrowed to one tick during active hours. That's comparable to the most liquid VIX futures contracts. And you can trade twenty-four hours a day, which is a huge advantage for day traders who want to react to overnight news. Luna: Let's drill into a specific strategy. Suppose you're a day trader and you see the VIX futures curve in contango but spot VIX is spiking. How do you use perps? Lucas: I would look at the term structure of funding rates. If the perp is trading at a premium to spot but the funding rate is positive for shorts, that means the crowd is heavily long. That is a classic contrarian setup. You can short the perp, collect positive funding, and if the VIX mean-reverts, you profit on the price move and the funding. I saw that setup play out twice last week — once on Tuesday and again on Thursday. Luna: That's a short volatility trade with a tailwind from funding. But what if the trend continues and the VIX keeps spiking? You'd be short into a rally. Lucas: That's why risk management is paramount. If you're short perps, your stop needs to be based on VIX level, not just price. I'd use a hard stop at a VIX level that invalidates the mean-reversion thesis — say, if VIX breaks above twenty-two, given that twenty was the previous resistance. And position sizing matters: you don't want to be short more than, say, two percent of your account notional. Luna: So it's a scalping tool more than a core portfolio hedge. The liquidity allows you to get in and out quickly. Lucas: Exactly. And this is where Kalshi perps shine for day traders. The ease of execution — click, click, done — versus navigating futures expiration calendars or options greeks. If you're a pure price-action trader, perps are a natural fit. Luna: I want to ask about the regulatory side. Kalshi is a cftc regulated exchange for event contracts. Perps are a new product. Does the CFTC treat them differently? Lucas: As of now, Kalshi perps are structured as derivatives on their event contracts. They're not futures in the traditional sense, but they fall under CFTC jurisdiction. The key difference is that perps are settled in cash and have no expiration. The CFTC has allowed them under Kalshi's existing designation as a designated contract market. That said, regulators are watching closely. Any change in stance could affect liquidity, but for now, the product is fully legal and the volume suggests it's here to stay. Luna: And if the VIX stays elevated, the perp market could become a primary venue for volatility hedging, especially for retail and small institutions that find VIX futures too clunky. Lucas: Absolutely. In fact, I think the growth of perps could eventually feed back into the VIX itself. If enough traders use perps to hedge, the hedging activity could dampen VIX spikes because the hedging is done on a separate venue. But that's speculative. For now, the practical takeaway is: if you trade volatility, you should at least be aware of Kalshi perps. Open an account, paper trade for a day, get a feel for the funding mechanism. It's a new tool that expands the day trader's toolkit. Luna: Speaking of tools, I want to mention something here — we keep this podcast ad-free and listener-supported. If you're getting value from these conversations, you can support us at buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash fexingo. It helps us keep doing deep dives like this without any sponsor interruptions. Lucas: Yeah, we really appreciate it. And it allows us to go deeper into these niche trading strategies without worrying about ad slots. So thank you to anyone who contributes. Luna: Alright, back to perps. One thing I haven't seen discussed much is the interaction between Kalshi perps and the VIX futures basis. If the perp funding rate diverges from the futures roll yield, could there be an arbitrage? Lucas: There could be, but it's not easy to execute because the two products settle on different indices. Kalshi perps track a custom volatility index, not the VIX exactly. They call it the Kalshi Volatility Index, which is a blend of VIX and other volatility measures. So the basis is not pure. But for a quantitative trader, there might be a statistical arbitrage opportunity if the divergence becomes extreme. For a retail day trader, I'd say focus on the directional and funding plays rather than basis arbitrage. Luna: Makes sense. Let's talk about risk controls. Kalshi has a liquidation mechanism for perps, right? Similar to crypto exchanges. Lucas: Yes, if your position goes against you and your margin falls below the maintenance threshold, you get liquidated. The liquidation engine is automatic. That's another reason to use low leverage. If you use ten times leverage, a ten percent move against you wipes you out. With the VIX moving five percent in a day easily, that's dangerous. I recommend two to three times leverage maximum for perp trading, especially when the VIX is elevated. Luna: And the funding rate itself can be volatile. During the spike last week, funding spiked to an annualized rate of over fifty percent for longs. That's a huge cost if you're holding through multiple cycles. Lucas: Which is why day trading perps is ideal. You avoid the funding cost by closing before the next funding timestamp. And if you're short, you earn that high funding. That's a powerful tailwind. In fact, I know some traders who are exclusively short perps when funding is positive for shorts, scalping small profits on mean reversion while collecting funding. It's a high-frequency strategy that works in a range-bound volatility environment. Luna: So the key is to treat perps as an intraday instrument, not a swing trade, unless you're very confident in the volatility direction and willing to pay funding. Lucas: Exactly. And monitor the VVIX. The VVIX at ninety-six is low relative to historical norms. It suggests that options markets don't expect the VIX to spike further. That could be a contrarian signal for a VIX breakout. If the VIX does break higher, the VVIX will catch up quickly, and perps will reflect that. Traders should have a plan for both scenarios. Luna: So a possible setup: if VIX breaks above twenty-two, buy the perp with a tight stop, expecting a VVIX expansion. If VIX fails at twenty, short the perp and collect positive funding. Lucas: That's a clean framework. And it uses the data we have right now: VIX up thirty percent in five days, VVIX barely moved, a divergence that usually resolves. The direction of resolution is what you're betting on. Kalshi perps give you a way to make that bet with precision. Luna: One more thing: we should mention that Kalshi also has perps on bitcoin and other assets. Are those useful for day traders? Lucas: They are, but the bitcoin perp competes directly with crypto perpetuals on Binance and Bybit. The advantage of Kalshi is that it's cftc regulated, so US traders can access it without VPNs. But the liquidity on crypto perps is much deeper. For now, the VIX perp is the star. That's where the edge is for volatility traders. Luna: So to sum up: Kalshi perps are a new tool for day traders to trade volatility without the baggage of VIX futures and options. The funding mechanism is manageable for intraday trades, and the one billion in volume shows real liquidity. Use them for directional plays on VIX, for funding carry trades, and to express views on volatility of volatility. Lucas: And always size small, use stops, and understand the funding schedule before you enter. It's a powerful tool, but it's still a derivative. Treat it with respect. The next few weeks will tell us whether Kalshi perps become a permanent part of the day trading landscape or a passing fad. I'm betting on the former. Luna: I think you're right. The innovation here is real. Thanks for breaking it down, Lucas. Lucas: Thanks, Luna. That's all for this episode. Next time, we'll look at how the VIX carry trade interacts with these new perp products. Stay sharp.