Anything with verifiable value — from physical commodities to weather conditions — can be an underlying asset for a futures contract. Expectedly, futures contracts were created for the CBOE’s Volatility Index (VIX) by the Cboe Futures Exchange in 2004 to provide market participants with a way to bet on the expected market volatility.

VIX futures show the market’s estimate of the value of the VIX Index on various expiration dates in the future. It gives traders the opportunity to speculate on the financial derivative using volatility trading strategies, including risk management, alpha generation, and portfolio diversification. But what exactly is the volatility index?

Vix Futures Contract Specifications
Symbol
VX
Exchange
CBOE
Tick Size
$50.00
Contract Size
$1000 times VIX
Contract Months
All months
Trading Hours
Extendend session: 3:30 p.m. to 8:30 a.m., except for Mondays when the market opens at 5:00 p.m // Regular Session: 08:30 a.m.-03:15 p.m.
Settlement
Cash
Last Trading Day
Trading Ceases 8:00 A.m. CT on the final settlement day, which is 30 days before the S&P- 500 option expiration

 

What is the VIX?

The VIX is the ticker symbol of the Cboe Volatility Index, which is a real-time market estimate of the expected volatility in the stock market. Often referred to as the investors’ fear gauge, the VIX Index is considered the first barometer of the equity market volatility by most market participants.

It is derived by using real-time price quotes of the S&P 500 Index options (SPX), as listed on the Chicago Board of Options Exchange (CBOE). The VIX Index is calculated — with both call and put options — between 2:15 a.m. CT and 8:15 a.m. CT and between 8:30 a.m. CT and 3:15 p.m. CT, and only the options with more than 23 days and less than 37 days to the Friday SPX expiration are used in the calculation. The qualifying SPX put and call options are then weighted to get a constant, 30-day estimate of the expected volatility of the S&P 500 Index.

The rationale behind the VIX calculation is that institutional investors use S&P 500 Index options to hedge their positions in the stock market, so the balance between SPX put and call options can give a good estimate of investor sentiment — pessimism or optimism.

Many market participants, such as financial analysts, fund managers, investors, and retail traders, closely monitor the VIX Index to get an idea of the dominating sentiment in the market. The VIX itself is only a number and not a tradable product, so the Cboe Futures Exchange created futures contracts on it — VIX Futures, with the ticker symbol VX.

Why Trade the VIX Futures

There are many reasons to trade VIX futures. Some trade it to manage their exposure in the stock market, while others use it to diversify their investment portfolio. However, most of the people who trade the VIX futures contracts do it for speculative purposes.

Speculation: Traders use the VIX futures contract to bet on the level of volatility anticipated in the stock market. The contract is cash settled, so people trade it basically for monetary benefits. Moreover, the VIX can be very volatile, providing ample opportunities to profit from the fluctuations.

Portfolio diversification: It has been proven that spreading investment across different asset classes is better than concentrating on a few assets. Fund managers and big investors are always looking for more assets to channel their funds into, and the VIX futures provides them with the opportunity to trade the market volatility itself.

Risk management: The VIX Index rises when the broad stock market index is declining. As a result, some institutional investors and traders use VIX futures to hedge their exposure in the stock market.

Vix Futures Trading Strategies

Vix Trading Strategy

Vix Trading Strategy

As with every other futures market, it’s possible to create profitable trading strategies on the VIX futures market. However, with the VIX futures market, it’s very important to understand the concepts of contango and backwardation, and how they affect the pricing of the market. This is covered in our article on VIX trading strategies.

If you’re interested in getting edges for various futures markets delivered right to your inbox, we recommend that you have a look at our unique edge membership!

How VIX Futures Work

The Cboe Futures Exchange (CFE) — an all-electronic, open-access marketplace — started offering the Cboe Volatility Index futures as its signature futures contract on the 26th of March 2004. Now, VIX futures trade on several electronic platforms in different parts of the world, including the XTB.

On the CFE platform, the VIX futures are generally quoted with the symbol VX, but some figures may be added to denote the expiration period. Each VIX futures contract represents 1000 units. In other words, the value of one futures contract is 1000 times the respective VIX Index value. The contract multiplier is, therefore, $1,000.

The minimum tick size is 0.05 VIX points. When multiplied by the multiplier, the dollar value for the minimum price fluctuation is $50.00 per contract. The individual legs and net prices of spread trades in the VX contract may be in increments of 0.01 index points, which has a value of $10.00 for one contract size.

Prior to 2015, only monthly VIX futures contracts were traded on the CFE, but now, both monthly and weekly expirations in VIX futures are available and trade almost 24 hours a day during the weekdays. The weekly contracts were introduced to provide market participants with more opportunities to play short-term VIX positions and fine-tune the timing of their trading and hedging activities.

VIX futures weekly contracts are generally listed on Thursdays (excluding holidays) and expire on Wednesdays, but they have the same contract specifications as the monthly contracts. The Exchange may list for trading up to six near-term expiration weeks, nine near-term serial months, and five months on the February quarterly cycle for the VX futures contract. All contracts are cash settled at expiration.

Trading hours (in CT)

Type of trading hoursMonday – Friday
Extended5:00 p.m. (previous day) to 8:30 a.m.
Regular8:30 a.m. to 3:15 p.m.
Extended3:30 p.m. to 4:00 p.m.

Market orders are not accepted during the extended trading hours; only stop and limit orders are permitted. All order types (market, stop, and limit orders) are accepted during regular trading hours.

Factors That affect VIX Futures

A lot of market factors can directly or indirectly impact the VIX futures prices, but the two major ones are these:

The stock market phase: The stock market moves in cycles/phases — bull and bear markets. When the market is in a bullish phase, the S&P 500 Index moves upwards, while the VIX Index and the VIX futures decline. Conversely, when the stock market is bearish, the VIX Index and the VIX futures rise.

Contango and backwardation effects: The spot VIX Index tends to mean-revert at extreme values, and the futures market prices in this characteristic of the index. So, when the spot index is at very low values, the futures contracts sell at a premium (contango). When the spot index is at extremely high values, the futures contracts sell at a discount (backwardation).

Conclusion

The VIX futures give market participants the opportunity to speculate on the expected market volatility. It trades on the Cboe Futures Exchange (CFE)’s all-electronic marketplace.

Don't Miss Our

Swing Trading Course!

ARE YOU IN?

Sign up to our newsletter to get the latest news!

Login to Your Account



Signup Here
Lost Password