Why do long VIX futures positions consistently lose money over time?

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AcadiFi · Accepted Answer

VIX futures typically trade in contango: the term structure slopes upward because investors demand positive expected return for shorting volatility (volatility spikes hurt most portfolios). Second-month VIX futures might trade at 22 while spot VIX is 16. Each month, a long-roll ETF sells the expiring front contract (converging toward spot, say 17) and buys the next month (still at 22), systematically selling low and buying high. This 'roll cost' runs 0.5%-1% per month in normal markets, compounding to 8-12% annually.

Velvetine Vol Arb runs the opposite trade: short-roll, capturing the carry. Risks are enormous during vol spikes (Feb 2018 XIV blow-up wiped out $3B overnight). The roll yield equals (F1 - F2) / F2 per period, negative in contango and positive in backwardation. Calm markets almost always show contango, while vol spikes flip the curve to backwardation. Because VIX is mean-reverting and has no storage cost to enforce arbitrage, the term structure reflects risk premia rather than cost-of-carry, making systematic short-vol strategies profitable but exposed to catastrophic tail events.

Why do long VIX futures positions consistently lose money over time?

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