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This question was inspired by this Motley Fool article: VIX Investing: Why Not Just "Buy Low Fear, Sell High Fear"?

Buying low fear and selling high fear seems to be a guaranteed profit strategy. Simply buy when the VIX index is low, and sell when the VIX index is high. In truth, however, VIX ETFs and ETNs fail to track the VIX accurately, and they actually decline in value over time.

Because VIX futures track the VIX much better than ETFs or ETNs, why can't I use VIX futures instead? Specifically, my strategy is this:

  1. When the market is relatively peaceful and the VIX index is low, buy a VIX futures contract.

  2. Avoid using leverage by putting up the full value of the futures contract in my trading account. This is done in order to avoid margin calls and subsequent liquidation.

  3. Hold the contract for a few months and wait for the market to become volatile.

  4. Sell to close the position when the VIX index is high.

Wouldn't this strategy basically be foolproof and profit-guaranteed? Or did I miss something?

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    What if the market is never "peaceful" enough to enter the position? How do you decide what is "relatively peaceful" enough? What happens if "wait for the market to become volatile" so you can exit your position takes more than a few months?
    – Ben Voigt
    Oct 8 '20 at 14:58
  • With "trading ideas!" like this, I truly encourage folks to literally try it. Just put a couple hundred bucks in an account and go for it. It really seems to be the ONLY way to explain/show the situation.
    – Fattie
    Oct 8 '20 at 15:34
  • I'm not a futures kinda guy. How much cash do you have to put up to cover the full value of the futures contract? And does it really matter whether you put up the full value or not? The risk is the same. Oct 8 '20 at 16:21
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VIX futures track the VIX much better than ETFs or ETNs

This is incorrect -- the ETPs themselves track VIX futures. You may see more of a difference because you watch ETPs over a longer time, whereas each futures contract expires. (Not to mention daily rebalancing effects for leveraged and inverse ETPs.)

If you could buy and sell the VIX itself, you could indeed make huge profits on average, because the VIX is known to range between about 10 and 80, and rarely above 40, so you know when it's high or low. But the VIX is not tradable, and its futures discount the expected mean-reversion.

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OK so you buy VIX when it's "low" and sell it when it's "high". Sounds simple, right?

(I'm going to refer to spot prices here but you can mentally think of future prices for your scenario)

When do you start? When is the VIX "low"? the VIX is currently in the mid-20s. A year ago it was 12. Should you buy it now or wait until it goes closer to 12? In March it was in the 80s! Which way will it go from here? Your guess is as good as anybody's.

Let's say you buy now at 25 and it goes up to 40. Do you sell? Let's say you sell at 40 and it shoots to 80 (like it did in March) - when do you get back in? If you wait until it drop back to 40, you've accomplished nothing. Do you wait until it gets back to 25? Who knows when that will be? Meanwhile, your money is doing nothing while you wait.

Or let's say you buy at 25 and it goes to 12 like it was before the pandemic (and was under 10 for over a year before that). Do you just sit and wait. or cut your losses at some point to put your capital in something useful?

While the VIX does have some aspects of "mean reversion" and may seem like a good market to "time", you can't predict the future of the VIX any better than you can predict an individual stock. It can always go higher and can always go lower. There are just as many periods where it seems "low" but goes lower or seems "high" but goes higher then the opposite.

Can you make money? Certainly! But it's far from foolproof.

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  • Let's say you buy now at 25 and it goes up to 40. Let's say you sell at 40 and it shoots to 60 (like it did in March) - when do you get back in? If you wait until it drop back to 40, you've accomplished nothing. Buying at 25 and selling at 40 isn't accomplishing nothing. That's +15. The problem is buying at 25 and it goes to 12 and stays down there for a long time. And FWIW, the VIX was in the 80's in March. Oct 8 '20 at 15:41
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    I'm saying you've accomplished nothing by selling at 40 and re-buying at 40.
    – D Stanley
    Oct 8 '20 at 15:57
  • And you're right about March - I was looking at weekly closes, not daily.
    – D Stanley
    Oct 8 '20 at 15:58
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    You gloss the difference between spot and futures prices, but that is the whole point. For spot VIX, "you can't predict the future of the VIX any better than you can predict an individual stock" is absolutely wrong. You have a statistical edge, like a biased coin, that when the spot VIX is close to 10, it is much more likely to go higher than lower. This is very unlike a stock, but alas is not tradable. The futures do fit your description.
    – nanoman
    Oct 8 '20 at 18:13
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There's one sentence in the article which sums it all up quite nicely:

Oh, Dan, if it was only so easy, we'd all be doing it.

This article recommends shorting the VIX after the January bounce 3 VIX ETFs to Fade the January Bounce. It's the exact opposite of what you're suggesting but if you know what happened to the VIX in late February, you can extrapolate how bad being on the wrong side of this is, especially with futures. Several VIX ETNs shut down because of the size of the move.

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  • The fact that the VIX is not perfectly predictable is not a reason it wouldn't be profitable. It is predictable (specifically, mean-reverting) in a way that asset prices are not. Over time, buying the VIX low (close to 10) would be sound. The real reason is that the VIX isn't an asset and you can't trade it directly.
    – nanoman
    Oct 8 '20 at 18:05

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