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How Back-Month VIX Futures Reference Their Settlement Options

Article Quant Q&A · Author: CQM
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Summary

The document addresses which S&P 500 options determine the settlement value of VIX futures with expirations beyond the nearest contract. It explains that each VIX future references the option maturity that will be the front month when that future expires. As a result, a back-month VIX future is linked to longer-dated SPX options rather than simply to the options that are front month today.

The example describes a December VIX future settling from January SPX options, because those options would be the front-month options at the future’s expiration. This resolves the apparent paradox by aligning the option maturity with the future’s settlement date. The explanation is brief and conceptual; it does not detail the VIX calculation, settlement procedure, or how futures prices reflect expectations and risk premia before expiration.

Key ideas

  • Each VIX future is tied to the option maturity that is front month when the future expires.
  • Back-month VIX futures therefore reference longer-dated SPX options than the nearest VIX contract.
  • The stated December contract example uses January SPX options at settlement.
  • The explanation concerns settlement reference maturity and does not analyze how futures are priced before expiration.

Tags

FuturesOptionsVolatility
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# What are VIX back-month futures based on?


# What are VIX back-month futures based on?












The VIX calculation is a weighted average of prices for front-month out-the-money options on the S&P index.

So for VIX futures, this makes sense for the front month vix futures (being based on a front month formula) but what about the months further out? It seems to gets kind of paradoxical, but are back month vix futures based on front month out-the-money options? Seems like we can make a better formula than that

(for a further conundrum, what does that mean for the back month options on an an ETF based on mid-long dated VIX futures based on front-month out-the-money options on the S&P - dont answer that)

insight appreciated

## Answer by onlyvix.blogspot.com (score 4, accepted)

https://quant.stackexchange.com/a/3525

Yes, all of VIX futures are based on THEIR RESPECTIVE front month options, so you have to realize that for long-dated VIX futures these are long-dated options. So for example settlement value of VIX DEC 12 futures will be based on SPX JAN 13 options, which will be front-month options at the time of VIX futures expiration.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.