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Why Are There Different Prices for VIX® Spot and VIX Futures? by Matt Moran

by Administrator on 01-18-2012 11:02 AM

Investors often inquire as to why the prices and the price movements for the VIX (spot) Index and the VIX tradable instruments (futures, options, and ETPs) often are different.

For example, yesterday (Tuesday, January 17th) the VIX spot closed at 22.20 and the VIX March futures closed at 25.55 (delayed price quotes are available at www.cboe.com/VIX ).

 

Valuations of VIX futures and options are based on expected values of VIX at the expiration date in the future (rather than the current, or "spot" VIX value).  The forward values of the VIX are estimated using the price quotations of S&P 500 options that will be used to calculate the exercise settlement value for VIX on the expiration date (and not the options currently used to calculate spot VIX). 

So for example, the current price of the March VIX futures reflects investors’ expectations of what the expected 30-day volatility will be on the VIX futures expiration date of Wednesday, March 20, 2012.

MEAN REVERSION

The VIX Index tends to be mean-reverting over long time periods, and the average daily closing value of VIX in the 22 years from 1990 through 2011 was 20.57.  The VIX futures prices often are higher than the VIX Index at times when the VIX is at relatively low levels (e.g., under 15).  Conversely, the VIX futures prices often are lower than the VIX Index at times when the VIX is at relatively high levels (e.g., above 35)

VOLATILITY OF VOLATILITY

The historic volatility of daily returns in 2011 was 139.9% for VIX spot and 97.0% for VIX near-term futures.  The VIX spot index usually has bigger moves than the VIX futures.

 

LATE 2011 – VIX SPOT AND FUTURES

On August 8, 2011 -- the VIX Index (spot) rose 50%, the VIX Aug. 2011 futures rose 25%, and the VIX Nov. 2011 futures were up 10%.

 

EARLY 2011 – VIX SPOT AND FUTURES

Throughout the months of February through May 2011, the VIX often was in was in contango, except around the time after the March 11 earthquake and tsunami in Japan.

 

LATE 2008 – VIX SPOT AND FUTURES

On November 20, 2008 -- the VIX Index (spot) reached its highest daily close of 80.86, but the VIX Feb. 2009 futures were priced at 54.67 (reflecting investors’ expectations of the value of VIX three months in the future).  In October and November of 2008, the VIX Index often was in backwardation.

 

GROWTH IN VOLUME

Average daily volume in VIX futures grew from 4,543 in 2009 to 47,744 in 2011.

 

More information on the VIX Index and VIX futures and options is at www.cboe.com/VIX

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Comments
by adinfinite on 01-18-2012 10:24 PM
Options

I had to read this twice ( in parts) to get it. But i think i do now. I am one of those who trades options on the VXX now and then without a clue as to how its value is really derived and get confused when it doesn't move like i think it should. this helps to clear things up a bit. thanks. 

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About the Author
  • Mr. Bittman is the author of two books, Options for the Stock Investor, (McGraw-Hill, 1996), and Trading Index Options (McGraw-Hill, 1998). He teaches courses for public and institutional investors, and he has presented several custom courses throughout the U.S., Europe, South America and Southeast Asia. In 1980 Mr. Bittman began his trading career as an equity options market maker at the Chicago Board Options Exchange. From 1983 to 1993, he was a Commodity Options Member of the Chicago Board of Trade where he traded options on financial futures and agricultural futures. Mr. Bittman received a BA, magna cum laude, from Amherst College in 1972 and an MBA from Harvard University in 1974. In addition to his responsibilities at The Options Institute, Mr. Bittman is also a member of the faculty of The Illinois Institute of Technology, where he teaches in the masters level Financial Markets and Trading Program.
  • Mr. Kearney began his long association with the CBOE when he became an independent Market Maker in early 1981. Mr. Kearney traded options full time on the trading floor until 1992 and periodically thereafter until 1996. In early 1992 he became a founding partner and Registered Options Principal of a brokerage firm based in Chicago, a member firm of the CBOE. Mr. Kearney’s responsibilities included development and implementation of hedging and trading strategies using listed options for their institutional clients as well as their retail investors. Mr. Kearney is the co-author of Understanding LEAPS®, published by McGraw-Hill, September 2002. He has been a regular contributor to many news services including Reuters, Derivatives Week, BARRON’S, CNBC, Bloomberg, Group W, The CBS Radio Network, FORTUNE, Ticker Magazine, Stock Futures and Options, BBC TV and Radio, NPR, and others. Mr. Kearney served on various committees at the CBOE, including the Arbitration Committee from 1984 to 1996. Prior to joining the CBOE Mr. Kearney was a marketing director for NCR Corporation. Mr. Kearney is a graduate of St. Mary’s University (MN), BS, 1971, and pursued his MBA at Lake Forest Graduate School of Management. In 2006 he completed a 3-year SII/SIA program at the Wharton School of the University of Pennsylvania.
  • Peter B. Lusk is an instructor at the Options Institute, the educational arm of the Chicago Board Options Exchange. He teaches option courses for public and institutional traders and has contributed educational type articles to various financial publications. Peter has spoken to thousands of investors across North America the past few years including over 200 webinars for the CBOE and member firms on trading options. He can also be seen each week on CBOE-TV with his show, Strategy of the Week. In addition to his responsibilities at the Options Institute, Peter serves as an Instructor for the Options Industry Council – an organization representing the options industry in the U.S. Prior to working at the Options Institute, Peter was a highly successful market maker for many years on the floor of the CBOE trading equity options. He was also involved in options training for new market makers at Lakota Trading in Chicago. As a professional trader, Peter enjoys sharing his knowledge of proven option strategies and risk management at the Options Institute.
  • Russell Rhoads, CFA, is an instructor with the Options Institute at the Chicago Board Options Exchange. He joined the Institute in 2008 after a career as an investment analyst and trader with a variety of firms including Highland Capital Management, Caldwell & Orkin Investment Counsel, TradeLink Securities and Millenium Management. He is a financial author and editor having contributed to multiple magazines and edited several books for Wiley publishing. In 2008 he wrote Candlestick Charting For Dummies. Since joining the Options Institute he authored Option Spread Trading: A Comprehensive Guide to Strategies and Tactics which was released in January 2011 and recently finished work on Trading VIX Derivatives: Trading and Hedging Strategies Using VIX Futures, Options, and Exchange Traded Notes which was published in August 2011. In addition to his duties for the CBOE, he instructs a graduate level options course at the University of Illinois – Chicago and acts as an instructor for the Options Industry Council. He is a double graduate of the University of Memphis with a BBA ('92) and an MS ('94) in Finance and also received a Master's Certificate in Financial Engineering from the Illinois Institute of Technology in 2003.
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