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Shorting VIX in a Low Volatility Environment



The average VIX close in the second quarter of 2017 was 11.43 which is the second lowest on record. Also, this is the first time we have had back to back quarters with the average closing price for VIX coming in below 12.00 as the first quarter of this year witnessed an average VIX close of 11.67.  These low numbers just emphasize what we all already know, the first half of 2017 has been period of very low volatility.  The chart below which shows the high, low, and average for VIX by quarter is a great visual depiction of the current low volatility environment.  



Logic would dictate if VIX has been low, selling VIX futures has been a terrible strategy for the first half of 2017.  Typically selling a market when it is low doesn’t work too good.  However, volatility derivatives have their own unique behavior, and when VIX is low and remains so, selling VIX futures is a pretty solid trading strategy.  At least based on history.  


CBOE has several indexes that depict systematic derivative strategies.  The CBOE VIX Premium Strategy Index (VPD) is an index that tracks the performance of selling 1-month VIX futures contracts.  The performance below shows how VPD performed versus the S&P 500 for the first half of 2017.



The index rose just over 7% in the first six months of 2017.  However, do note there are a couple of speedbumps along the way which coincided with a brief rise and fall for VIX.  This is common for consistent volatility selling strategies and something we refer to in Chicago as, “Picking up pennies in front of a steamroller.”  Basically this may be interpreted as this sort of strategy making several small profits, but periodically experiencing significant drawdowns.


There are two lessons we can learn from the performance of VPD in 2017.  First, even when VIX is low, selling volatility in the form of short VIX futures positions can result in profits.  Second, selling volatility can result in some significant drawdowns in performance.


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RISK DISCLAIMER: Trading in futures products entails significant risks of loss which must be understood prior to trading and may not be appropriate for all investors. Past performance of actual trades or strategies cited herein is not necessarily indicative of future performance. The information contained herein is provided to you for information only and believed to be drawn from reliable sources but cannot be guaranteed; Phillip Capital Inc. assumes no responsibility for errors or omissions. The views and opinions expressed in this letter are those of the author and do not reflect the views of Phillip Capital Inc. or its staff.