• FUTURES ON THE CBOE Volatility Index
(VIX) are becoming more popular with
futures traders because they’re direct plays
on the market’s volatility, or “vol.” And if
you’ve traded /VX futures, you’ve likely run
into the /VX basis. That’s the di;erence
between the /VX future’s price in one expiration, say February, and the /VX future’s price
in another expiration, say, March. You have
to be familiar with the /VX basis, especially
if you want to roll a /VX position from one
expiration to the next, or when you’re deciding which /VX expiration to trade. To the
untrained eye, the /VX basis can be confusing, so let’s give your eyes a little training and
kick the confusion to the curb.
It’s a Little Unique
For other futures products, like /ES on the
S&P 500, or /ZB on Treasury bonds, the basis
is determined by the cost of carrying a position
in the underlying. But the basis in /VX futures doesn’t have a carry component. There
isn’t an underlying VIX to buy, which means
there’s no arbitrage relationship that keeps
/VX futures in di;erent expirations in line.
They’re free to move up and down. The confusion arises when one /VX is going up, while
another’s going down. Why can that happen?
Calculating the basis can be relatively
simple. First, subtract the price of the front-month /VX future from the price of the
back-month /VX future. For example, if the
February /VX future is trading for $13, and
the March /VX future is trading for $14.20,
the Feb–Mar /VX basis is $14.20 – $13 =
$1.20. In this case, the $1.20 basis is positive,
and it’s in contango.
If the Feb /VX future is $14, and the March
/VX future is $13.50, the Feb–Mar /VX basis
is $13.50 – $14 = $-0.50. The basis is negative
(the back-month future is trading for less
than the front month), and it’s in back ward-ation. The /VX can go from positive to negative and back again. But what does it mean?
Gauging the Market’s Expectations
Remember that the /VX future is the market’s expectation of what the VIX might be at
the future’s expiration. And the VIX itself is
the market’s expectation of what the volatility of the SPX might be over the next 30 days.
So, the /VX can be thought of as a “future on
a future.” As such, the /VX basis can indicate
when in the future the market “fears” a
VOL WHISPERER ; SEASONED
IN THE MONEY
Now, About Those /VX Moves
BIG IDEA: GET TO KNOW THE ;VX BASIS;WHAT IT IS, HOW TO
CALCULATE IT, AND WHY IT MOVES THE WAY IT DOES.