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Minyan Mailbag: A Closer Look at the VIX Futures


Futures should tend to trade near fair value, but there is no guarantee that they do...


Editor's Note: Minyanville is a community of people who share an interest of fiscal literacy. As perspective is an important aspect of our daily routine, we share this exchange with hopes that it adds balance to your process.

Professor Succo-

I did some research over the weekend and I think the VIX futures are a sham. At the very least, the following claim is simply not true:

"DESCRIPTION: CBOE Volatility Index (VIX) Futures will track the level of an "Increased-Value" Index (VBI), which is 10 times the value of VIX."

For example, the 10 day move of the weighted VIX is +6.60 while the 10 day move of the futures is -4.00. The daily correlation over the same period is 0.24, demonstrating that they are actually negatively correlated. Over the complete history of the contract, the front month contract and the index actually move in opposite directions 18% of the time.

It is really misleading for the CBOE to give people the impression they are trading a contract related to the VIX.


Minyan JK


You have a valid point.

There are two factors at play here: 1) Futures should tend to trade near fair value, but there is no guarantee that they do and 2)The calculation of the VIX index being quoted changes each day, therefore it is not the true underlying of the future.

This is really a much more complicated product than the CBOE let on. You see, the VIX is an index that weights options with an average of 30
days until expiration. As each day passes, index component weightings necessarily change to keep the index's average time to expiration at 30 days.

Due to this unique index calculation, the index that is currently quoted is not the same index that any futures contract is based on. The futures contract is based on a future version of the index. So if the slope of the term structure changes, which it very often does, the correlation between VIX and VIX futures certainly will not be high and can be zero or even negative.

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