Hi All
Could someone help me understand the answer to the below question , the answer is 3. I understand that the trader will sell the Vix second month contract as it gets pulled to the spot, the price would be lower but why does the trader buy the front month contract as even that convergys to the spot and by buying that the trader i guess should incur a loss . Thanks.
A volatility trader observes that the VIX term structure is upward sloping. In particular, the VIX is at 13.50, the front-month futures contract trades at 14.10, and the second-month futures contract trades at 15.40. Assuming the shape of the VIX term structure will remain constant over the next three-month period, the trader decides to implement a trade that would profit from the VIX carry roll down. She will most likely purchase the:
- VIX and sell the VIX second-month futures.
- VIX and sell the VIX front-month futures.
- VIX front-month futures and sell the VIX second-month futures.
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