Volatility Models

Roll-Yield Arbitrage

While an individual position in VIX futures or VXX, the Barclays iPath 1-month constant maturity tracker, offers no opportunities for diversification of equity exposure empirical findings show that VIX futures term structure can be used as a stock market predictive tool and that the negative slope of the structure can be considered as a contrarian market timing indicator.[1]

Lawrence McMillan reported a roll-yield arbitrage strategy based upon the differential between the first and third month VIX futures.[2,3,4] In short, the system goes long VXX calls if third-month-out $VIX futures settle at a lower price than front-month $VIX futures. The system’s net asset value (NAV) exceeds 3, win rates on low numbers of transactions average around 67%, and unattended drawdowns come in at less than 20%. Notably, McMillan recommends that the system function as a trade signal generator whose signals need be qualified by subsequent price activity.


  1. Alexander and Korovilas (2012) reported that an individual position in VIX futures, or VXX, the Barclays iPath 1-month constant maturity tracker, offers no opportunities for diversification of equity exposure, except during the onset of a major crisis. In short, they should be entered only as short-term speculative trades.
  2. Lawrence McMillan (2012) Options Strategist Newsletter (February 9, 2012).
  3. Lawrence McMillan (2017) Options Strategist Newsletter (April 7, 2017).
  4. Lawrence McMillan (2018) Proactive Advisor Magazine (May 10, 2017).