Trading Volatility and the VIX

The VIX Index seeks to measure the market’s current expectation of 30-day implied volatility of the S&P 500® Index, as reflected by the prices of near-term S&P 500® options. Because S&P 500® options derive value from the possibility that the S&P 500® may experience movement before such options expire, the prices of near-term S&P 500® options are used to calculate the implied volatility of the S&P 500®.

 

The value of a VIX futures contract is based on the expected reading of the VIX Index at the expiration of such VIX Futures Contract. As a result, a movement in the VIX Index today will not necessarily result in a corresponding movement in the price of VIX Futures Contracts. According to research by the CBOE, short dated VIX futures have historically shown a greater sensitivity to movements in the VIX index. VIX Weekly futures began trading at CBOE Futures Exchange (CFE®) on July 23, 2015. The addition of weekly expirations to standard monthly futures expirations offers volatility exposures with the potential to more precisely track the performance of the VIX Index. According to CBOE, “by 'filling the gaps' between monthly expirations, investors may obtain new opportunities to establish short-term VIX positions, and fine-tune the timing of their hedging and trading activities.”

CBOE Beta Chart

Research conducted by the CBOE indicates that VIX futures with a shorter duration have demonstrated a higher Beta to the VIX Index. If this relationship continues, the addition of weekly expirations to standard monthly futures expirations may offer improved tracking of the VIX Index.