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.
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