Latest / The Day Trading Podcast with Fexingo: Active Trading, Charts, and Short-Term Market Strategy / How Day Traders Read the VIX-VIX Futures Basis Trade
Transcript
- Lucas: VIX at 19.18 this morning. Up 17 percent in five days. The VIX futures curve is in steep contango — the front-month future is trading at around 21.50, so we've got more than two points of spread between spot and the first future. Luna: That's actually a pretty wide basis. I know we've talked about the vix vvix convergence trade before, but this feels like a different animal. Lucas: It is a different animal. The vix vix futures basis trade is probably the most classic short-vol play in the book. You sell the overpriced future, capture the contango decay as it converges to spot. But it's not as simple as 'VIX is high, so sell futures' — you have to read the term structure, the VVIX, and the macro context. Luna: Right. So walk me through the setup. What are you looking at first? Lucas: First thing: the slope. Today the front-month future is at 21.50, second month around 22. The curve is upward sloping but not absurdly steep — we're not in panic territory like March 2020. The basis is wide enough to matter, but not so wide that it screams 'too crowded'. Luna: And the VVIX — 99.50 this morning, up 13.5 percent. That's above its historical median but not extreme. Lucas: Exactly. The VVIX tells you how much premium option dealers are charging for VIX options. When it's elevated, it suggests the market expects VIX to stay volatile — which actually supports the contango trade because it means the futures might stay elevated for a while. Luna: But that's also a risk, right? If VIX spikes again, the futures gap up and you're underwater. Lucas: That's the key risk. The trade is effectively selling insurance. You're collecting premium in exchange for taking tail risk. If something blows up — a Fed surprise, a geopolitical event — VIX can jump 10 points in a day and the futures follow. That's why you need a stop or a hedge. Luna: So how would you hedge it? VIX call spreads? Lucas: You could buy a VIX call spread to cap your upside risk. Or you could pair it with a short equity position — if VIX spikes, equities usually drop, so the short equities hedges the vol loss. But that's a multi-leg position. For a pure vol trade, I like a defined-risk structure: sell the VIX future and buy a VIX call option to create a collar. Luna: Let's talk about the mechanics for day traders. You can't exactly day trade VIX futures in a traditional sense — they're cash-settled and have monthly expiries. Lucas: Right, but you can trade the VIX futures ETF products like the VXX or the UVXY. The VXX is designed to track the short-term VIX futures curve. When the curve is in contango, the VXX decays over time due to the roll yield. So a short position in the VXX is a proxy for the basis trade. Luna: And that decay is the edge — the VXX loses value daily from the roll, even if spot VIX stays flat. Lucas: Exactly. But you have to be careful with the VXX — it's not a perfect proxy. It rebalances daily, and the decay is path-dependent. If VIX spikes hard, the VXX can gap up faster than the futures decay. So you need to manage your position size and have a clear exit plan. Luna: What about the VVIX? We've done episodes on the vix vvix convergence trade. How does this basis trade relate? Lucas: They're cousins. The vix vvix convergence trade is about buying VIX when VVIX is high relative to VIX — essentially betting on mean reversion. The basis trade is about selling futures when they're expensive relative to spot. Both rely on a similar thesis: that volatility is mean-reverting and the premium is overpriced. But the basis trade is more direct — you're explicitly betting on the futures curve flattening. Luna: So when would you choose one over the other? Lucas: If the VIX itself is very high relative to its history — say above 30 — the vix vvix convergence trade might be appealing because VIX is already elevated and likely to drop. If the VIX is moderate but futures are in steep contango, the basis trade is cleaner. Today, VIX at 19 is not extreme, but the contango is attractive, so I'd lean basis trade. Luna: What's your specific entry criteria? Any rule of thumb? Lucas: I look at the spread between front-month future and spot. If it's more than 1.5 VIX points, that's a decent entry. Today it's over 2 — that's a solid signal. I also want the VVIX below 120 — if VVIX is too high, it means options are pricing in a potential vol explosion, which makes the tail risk too big. Today VVIX is 99.5, so that's fine. Luna: And your stop? Lucas: If the spread narrows by half a point quickly — say the future drops toward spot — that could be a sign of a vol spike coming. I'd exit or tighten the stop. Also, if the VIX itself breaks above 22, I'd get out. That's a level where the market is getting nervous. Luna: Let's talk about the broader market context. The S&P 500 is down 1.9 percent in five days, Nasdaq down 3 percent. The Russell up 1.2 percent — so there's rotation into small caps. That's a typical risk-on shift but with a vol spike. Lucas: Yeah, that's actually interesting. The Russell gaining while the S&P drops suggests a rotation out of mega-cap tech into value or small caps. That can be a sign that the market is repositioning, not panicking. If it were a true fear event, the Russell would be down too. So the VIX at 19 might be more about tech rotation than systemic risk. Luna: Which makes the basis trade safer — because you're not betting against a systemic panic, just against a rotation-driven volatility spike. Lucas: Exactly. That's the ideal environment for the trade. You want the vol spike to be sector-specific, not macro. When it's macro, the contango can invert quickly and you get crushed. Luna: One more thing — the VIX future settlement mechanics. How do you actually capture the gain if you short the future? Lucas: If you short a VIX future at 21.50 and hold it to expiration, it converges to the final settlement price, which is the opening print of the VIX on settlement day. If the VIX stays at 19, you make 2.50 points per contract. But you don't have to hold to expiry — you can close early if the spread narrows. Many traders close within a week to avoid the gamma risk near expiry. Luna: So it's a short-term trade, not a hold to expiry? Lucas: It can be either, but for day traders and swing traders, the sweet spot is holding for 2-5 days while the decay is most pronounced. The decay is not linear — it's faster in the first few days after the roll. So you want to enter right after the monthly roll, which just happened last week. Luna: That timing is key. You don't want to enter a week before expiration when the gamma is high. Lucas: Right. And we're in a good window now — the June contract rolled to July last Wednesday, so we're fresh into the new term structure. Luna: Alright, let's pull the trigger on a hypothetical trade. What's your play for today? Lucas: I'd short the July VIX future around 21.50, with a stop if it breaks above 22.50. Target 20.50 — that's where the spread would narrow to about one point. Position size small — maybe 10 percent of my vol allocation. And I'd buy a VIX 22 call as a hedge to cap the upside. Luna: Net credit on that structure? Lucas: Maybe 1.5 to 2 points on the future, minus maybe 0.5 on the call, so net around 1 to 1.5 points. Risk is defined — if VIX spikes to 30, the call limits your loss to the premium paid. Luna: I like that. Clean risk-reward. And if the basis narrows quickly, you're out early with a small profit. Lucas: Exactly. The goal is to capture the decay, not to get greedy. Consistent small wins compound. Luna: You know, talking about consistent small wins — that's something we try to deliver with this show too. If these discussions have helped you think about your trading differently, we'd really appreciate your support. It's what keeps the podcast ad-free and focused on the tactics that actually matter. Lucas: Absolutely. If you find value in what we do here, consider buying us a coffee at buy me a coffee dot com slash fexingo. It's a small gesture that goes a long way in helping us keep the lights on and the content coming. Luna: Right. And now back to the trade — one thing I want to circle back on: the VVIX at 99.5. That's actually a pretty important number for the basis trade, because it tells us that option dealers are pricing in a non-trivial chance of a VIX spike. Lucas: It does. But 99.5 is still below the 120 threshold I mentioned. So it's elevated but not alarming. I'd keep an eye on it — if VVIX starts climbing toward 110, I'd tighten my stop. That would signal that the vol of vol is increasing, which often precedes a VIX jump. Luna: Good call. And the other data point: the VIX itself up 17 percent in five days. That's a big move, but from a low base. It's not like we're going from 12 to 19 — that's actually a 58 percent increase in percentage terms. So the market has already repriced vol significantly. Lucas: Right, and that's why the contango is so wide. The futures market is pricing in that the VIX will remain elevated or even increase. But if the rotation trade continues and tech stabilizes, VIX could mean-revert back toward 15-16. That would be a windfall for the basis trade. Luna: So the key is monitoring the Russell-S&P divergence. If the Russell keeps rallying and the S&P stops falling, that's a sign the rotation is complete and vol should drop. Lucas: Exactly. I'll be watching that spread throughout the day. If the Russell extends its gains and the S&P flattens, I'd add to the short VIX futures position. If the S&P continues to slide and the Russell rolls over, I'd exit immediately — that's a risk-off signal. Luna: Great framework. So to recap: short the front-month VIX future when contango is wide, hedge with a call, manage with a stop based on VIX level and VVIX, and use the Russell-S&P divergence as a macro filter. Lucas: That's it. And remember, this is not a 'set it and forget it' trade. You have to watch it daily. The vol market can turn on a dime. Luna: Alright, Lucas. Good stuff. I think we've given listeners a concrete playbook to work with today. Lucas: Yeah, I hope so. The basis trade is one of those strategies that sounds simple but requires discipline. If you get the timing and risk management right, it's a consistent edge. If you get sloppy, it's a quick way to lose money. Luna: And that's the truth. Thanks for breaking it down.