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How to earn passive income with Volatility Index cash contracts?
Showing the last 7 days of overnight interest just shorting the volatility index. You basically get paid every day and even on weekends for holding on to the short contracts. Are there any risks holding over the weekend? Definitely. Volatility could spike when the market opens assuming negative news affecting the market happening over the weekends. Therefore, it is extremely important to set your stop losses as volatility spikes really quickly.
They have recently changed the reporting format and you can easily see the daily fees involved in trading such contracts. If you follow the proper rules for trading, this can be a good instrument to generate passive income.
Differences between SG cash contract and UK cash contract for Volatility Index
In Singapore, the most commonly traded volatility index cash contract is the SGX S&P 500 VIX Futures contract, which is based on the S&P 500 Index. This contract allows traders to speculate on the future volatility of the US stock market. The SGX S&P 500 VIX Futures contract is settled in cash and is traded on the Singapore Exchange (SGX).
In the UK, the most commonly traded volatility index cash contract is the IG Volatility Index (IG VIX) cash contract, which is based on the FTSE 100 Index. This contract allows traders to speculate on the future volatility of the UK stock market. The IG VIX cash contract is also settled in cash and is traded on the IG platform.
The specific features and trading conditions of the SGX S&P 500 VIX Futures contract and the IG VIX cash contract may differ, including contract size, tick size, trading hours, and margin requirements. Additionally, the overnight financing charges or credits may also differ between the two contracts, depending on the prevailing interest rates in each market.
Therefore, if you are interested in trading volatility index cash contracts, it is important to understand the specific features and trading conditions of the contract that you are trading, whether it’s in Singapore or the UK. It is also important to be aware of the risks involved in trading such contracts, as they can be highly leveraged and may result in significant gains or losses.
How are UK cash contracts overnight interest calculated?
When you hold a position in a financial instrument overnight, you may be subject to an overnight financing charge, which is also known as an overnight interest charge. This charge is the cost or the benefit of holding a leveraged position overnight, and it reflects the interest rate differential between the two currencies involved in the trade.
In the case of the IG VIX cash contract, the overnight financing charge will depend on the direction of your position, the notional value of the contract, and the prevailing interest rates in the market.
If you are long (bought) the IG VIX cash contract, you may be subject to an overnight financing charge, which will be calculated as follows:
Notional Value of the Contract x Long Financing Rate x (Number of Days Held/365)
The long financing rate is the interest rate charged on the notional value of the contract when you are long (bought) the contract. The number of days held is the number of days that you hold the position overnight. This charge will be deducted from your account if you hold a long position overnight.
On the other hand, if you are short (sold) the IG VIX cash contract, you may be eligible to receive an overnight financing credit, which will be calculated as follows:
Notional Value of the Contract x Short Financing Rate x (Number of Days Held/365)
The short financing rate is the interest rate that you can earn on the notional value of the contract when you are short (sold) the contract. This credit will be added to your account if you hold a short position overnight.
The specific overnight financing rates for the IG VIX cash contract will depend on the prevailing interest rates in the market and may change from time to time. You can check with your broker or the contract specifications provided by IG to find out the current overnight financing rates.
Prices on these markets for cash CFDs are synthetically created using the two most liquid futures contracts. This will result in a natural movement between these two contract prices and will be included in overnight funding adjustments. You’ll then either be debited or credited depending if you’re long or short, and whether the next future contract price is higher or lower.
Funding is based on the market cost of carry, plus an admin fee of 2.5% per annum.
Please note that open positions held through 10pm (UK time) on Fridays will be adjusted for three days’ worth of funding to cover the weekend.
How are SG cash contracts overnight interest calculated?
There are 3 steps to this formula:
- Basis (the daily movement along the futures curve)
(P3 – P2) ÷ (T2 – T1)
T1 = expiry date of the previous front future
T2 = expiry date of the front future
P2 = price of front future
P3 = price of next future - IG charge
Price x 2.5% ÷ 360 - Adjustment
(No. of contracts x value per contract) x (basis + IG charge)
Example:
You’re short 1 contract on the Volatility Index
The contract value is $1000
T2 – T1 = 31 days
P2 price is 15.50
P3 price is 16.50
Basis = (16.50 – 15.50) ÷ 31 = $0.03
IG charge = 15.50 x 2.5% ÷ 365 = $0.001
Adjustment = 1 x $1000 x ($0.03 – $0.001) = $29*
*$29 will be credited to your account as you were short, and the next future contract was higher than the front contract.
Most importantly!
Please note that trading financial instruments involves a high level of risk and may not be suitable for everyone. Any investment decisions you make are your own responsibility, and you should conduct your own due diligence before making any trades. The information provided by any third-party sources, including this platform, is intended for informational purposes only and should not be considered investment advice. Past performance is not indicative of future results, and any trading strategy you pursue carries the risk of loss. Before making any trades, it is important to carefully consider your financial situation, risk tolerance, and investment goals. We encourage you to consult with a financial advisor or seek other professional guidance as needed.
