Diagonal Volatility Carry

Investment objective. Add a non-directional, low-correlation return stream by harvesting the volatility risk premium (implied volatility tending to price richer than subsequently realised), expressed through a net-short VIX call structure, as an overlay.

Instruments / venue. VIX options only (listed, cash-settled, European-style; not OTC).

Structure and key risk characteristic. A net-short VIX call ratio — more nearer-the-money calls sold than further-out-of-the-money calls bought — in a medium-dated tenor, rolled as expiry approaches. Because more calls are sold than bought, the position remains net-short above the long strike and the upside tail is not capped: losses are unbounded if volatility spikes far enough. The long leg softens, but does not bound, the tail. 

Expiry selection. Medium-dated VIX options, rolled systematically as they approach expiry.

Strike selection. Short legs nearer-the-money; long leg further OTM.

Position sizing. VaR engine; the long leg is credited and size is reduced as VIX rises. Sizing mitigates but does not bound the tail, given the net-short structure.

Rebalancing triggers. Calendar / roll: re-established on a continuous roll as each tranche is exited near expiry. Event-based: early exit as expiry approaches. No trend filter is applied.

Greeks / execution. Per Common Framework.

Backtest methodology

(Sample period: 2023-03-08 – 2026-06-30; hypothetical)

• Average outperformance vs benchmark (S&P 500): + 0.20 % per month, + 0.60 % per quarter, + 2.42 % per year
• Average time in trade (holding duration): 30.5 days
• Average trade frequency: 0.91 per week, 3.95 per month