VIX Futures
Futures contracts on the VIX volatility index
What is VIX Futures?
VIX Futures VIX futures are standardized futures contracts based on the CBOE Volatility Index (VIX) that trade on the CBOE Futures Exchange (CFE). They allow traders to take positions on expected future levels of S&P 500 implied volatility without directly trading SPX options. Each VIX futures contract has a notional value of $1,000 times the VIX futures price and settles to a special opening quotation (SOQ) of the VIX on expiration morning. How it works: VIX futures do not track the spot VIX directly. Each contract reflects the market's expectation of what the VIX will be at that contract's expiration. The VIX futures term structure is typically in contango, meaning longer-dated contracts trade at higher prices than shorter-dated ones. This occurs because the VIX is mean-reverting and tends to trade around 15-20 in calm markets, but the uncertainty about future spikes adds a risk premium to longer-dated contracts. When markets panic, the term structure can flip to backwardation, with near-term contracts spiking above longer-dated ones. For example, the spot VIX might be at 14, while the front-month VIX future trades at 16 and the second-month at 17.5. A trader expecting a volatility spike could buy the front-month future at 16. If a market selloff pushes spot VIX to 25, the front-month future might jump to 22-24, generating a profit of $6,000-$8,000 per contract ($1,000 x point change). However, if volatility stays low, the future rolls down the term structure toward spot, losing roughly $1.50 per month ($1,500 per contract) in carry cost due to contango. VIX futures are the building blocks of popular volatility ETPs like VXX (short-term VIX futures ETN) and UVXY (leveraged VIX futures ETF). These products roll front-month VIX futures daily, which creates a persistent drag from contango. Understanding VIX futures mechanics is essential for anyone trading volatility products, as the term structure dynamics often matter more than the direction of the VIX itself.
Complete Definition
VIX futures are standardized futures contracts based on the CBOE Volatility Index (VIX) that trade on the CBOE Futures Exchange (CFE). They allow traders to take positions on expected future levels of S&P 500 implied volatility without directly trading SPX options. Each VIX futures contract has a notional value of $1,000 times the VIX futures price and settles to a special opening quotation (SOQ) of the VIX on expiration morning. How it works: VIX futures do not track the spot VIX directly. Each contract reflects the market's expectation of what the VIX will be at that contract's expiration. The VIX futures term structure is typically in contango, meaning longer-dated contracts trade at higher prices than shorter-dated ones. This occurs because the VIX is mean-reverting and tends to trade around 15-20 in calm markets, but the uncertainty about future spikes adds a risk premium to longer-dated contracts. When markets panic, the term structure can flip to backwardation, with near-term contracts spiking above longer-dated ones. For example, the spot VIX might be at 14, while the front-month VIX future trades at 16 and the second-month at 17.5. A trader expecting a volatility spike could buy the front-month future at 16. If a market selloff pushes spot VIX to 25, the front-month future might jump to 22-24, generating a profit of $6,000-$8,000 per contract ($1,000 x point change). However, if volatility stays low, the future rolls down the term structure toward spot, losing roughly $1.50 per month ($1,500 per contract) in carry cost due to contango. VIX futures are the building blocks of popular volatility ETPs like VXX (short-term VIX futures ETN) and UVXY (leveraged VIX futures ETF). These products roll front-month VIX futures daily, which creates a persistent drag from contango. Understanding VIX futures mechanics is essential for anyone trading volatility products, as the term structure dynamics often matter more than the direction of the VIX itself.
Related Terms
Frequently Asked Questions
What are VIX futures and how do they work?
VIX futures are contracts that let you trade expected future levels of the VIX volatility index. Each contract is worth $1,000 times the VIX futures price and settles to a special opening quotation on expiration day. They do not track the spot VIX directly but reflect the market's expectation of future VIX levels.
Why is the VIX futures curve usually in contango?
VIX futures are typically in contango because the VIX is mean-reverting and tends to trade around 15-20. Since there is always a chance of a volatility spike, longer-dated contracts include a risk premium above the current spot level. This makes later-month futures more expensive than front-month futures in normal market conditions.
How do VIX futures affect VXX and UVXY?
VXX and UVXY hold rolling positions in short-term VIX futures. In contango, they continuously sell cheaper expiring futures and buy more expensive longer-dated ones, creating a persistent drag on returns. This is why these products lose value over time in calm markets even when spot VIX is stable.
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