VIX futures are exchange-traded contracts that settle to the VIX Special Opening Quotation (SOQ) on expiration Wednesday. They trade on CBOE Futures Exchange and form the basis for all VIX exchange-traded products.
⚡ KEY TAKEAWAY: VIX futures in steep contango (front month 2+ points below second month) signal complacency and rich roll yield for short volatility strategies. Track the term structure before selling premium.
Why It Matters
VIX futures are the backbone of the volatility product ecosystem. Their term structure (contango vs. backwardation) determines the roll yield for all VIX ETPs and sets the fair value for VIX options. Understanding VIX futures is essential for any volatility-focused premium seller.
How It Works
VIX futures settle on Wednesday mornings to the SOQ, not spot VIX. In contango, front-month futures trade below back-month futures, creating negative roll yield for long-vol products. Approximately 85% of the time, VIX futures are in contango, providing a persistent tailwind for short-vol strategies.
Example
May VIX futures trade at 17 while June trades at 19, a 2-point contango. A premium seller sells a VIX May 20/25 call spread for $1.10, knowing the futures must rise 3 points just to reach the short strike. The contango provides a built-in buffer beyond simple probability calculations.
Common Mistakes
Traders compare VIX option strikes to spot VIX instead of the corresponding VIX future. If spot VIX is 15 but May futures are at 18, a VIX 20 call is only 2 points OTM against futures, not 5 points OTM as it appears against spot. This leads to selling premium that is closer to ATM than realized.
VIX futures are exchange-traded contracts that settle to the VIX Special Opening Quotation (SOQ) on expiration Wednesday. They trade on CBOE Futures Exchange and form the basis for all VIX exchange-traded products.
Why does VIX Futures matter for premium sellers?
VIX futures in steep contango (front month 2+ points below second month) signal complacency and rich roll yield for short volatility strategies. Track the term structure before selling premium.
How does VIX Futures work?
VIX futures settle on Wednesday mornings to the SOQ, not spot VIX. In contango, front-month futures trade below back-month futures, creating negative roll yield for long-vol products. Approximately 85% of the time, VIX futures are in contango, providing a persistent tailwind for short-vol strategies.
What are common mistakes with VIX Futures?
Traders compare VIX option strikes to spot VIX instead of the corresponding VIX future. If spot VIX is 15 but May futures are at 18, a VIX 20 call is only 2 points OTM against futures, not 5 points OTM as it appears against spot. This leads to selling premium that is closer to ATM than realized.
