What does a mid teens CAGR cost you?

Fifty Ways to Trade an Option

Not all volatility strategies use options.

Being so focused on calls and puts, it’s easy to forget there’s a whole world of derivatives that are linear and not convex. There’s bang for your buck with margin in the futures world, and things just move up and down.

I yadda-yadda’d over “things” and “just” - we’re about to talk about about the forward price of implied volatility, so nothing is quite so simple. In addition to the widely broadcasted fear gauge, there are listed futures on what implied volatility will be down the road.

The VIX is calculated by looking at a long strip of SPX options, and weighting them by the distance from the money, to come up with a measure of the expected variance. It’s always calculated at 30 days out, and isn’t tradeable in and of itself.

VX futures are derivatives that settle based on the VIX reading. If you own the VX/J5 contract. (VX is the base, “J” is the April contract month, 5 is the year) it will settle on April 16, 2025 to the value of the VIX that morning, or where 30 day forward variance is pricing on expiration.

Getting long (or short) the contract today at a price of 22.63 means you expect implied volatility to be higher or lower than that value on expiration. Another layer of abstraction would be VIX options, which track and settle around these futures prices.

With equity or index options, your opinion on volatility is pitted against what the underlying market realizes. Sell a straddle and you make money if stock moves less than the premium you collected. Yet there is a distinctly directional component any trade that isn’t delta hedged. Buying a call is a volatility trade, but it will also make money if stock goes up enough, even if that’s at a lower than implied rate.

Volatility futures are simply vol to vol terms - will implied volatility be higher or lower in the future no matter where SPX is. Trading a VX future lets you have an opinion on volatility without worrying about which strikes to set your condors at.

Today in Fifty Ways to Trade an Option, we’re going to look at a VX futures strategy that dynamically maintains a short volatility position at a fixed target date, benefiting from the structure and presence of a volatility risk premium.

What does a mid-teens CAGR cost you?