Practical Approaches to Pricing VIX Futures

Summary

The document contrasts theoretical modeling with a market-based approach to valuing VIX futures. It identifies variance gamma models as a theoretical framework for VIX futures and options, while noting that obtaining robust results with this model class can be difficult. The discussion does not provide model equations, calibration steps, or empirical comparisons.

For practical trading, it says floor traders commonly base hedging on the SPX option chain, because VIX is calculated from SPX options. The variance component can be isolated from those options using several approaches without extensive numerical work. This offers an intuitive reference for hedging, but the document does not specify which extraction method is preferred, quantify pricing accuracy, or address contract-specific details and changing market conditions.

Key ideas

• Variance gamma is presented as a theoretical model for VIX futures and options.
• The document cautions that robust results from this model class can be difficult to obtain.
• Practitioners are described as using the SPX option chain to guide VIX product hedging.
• The variance component of SPX options can be isolated through multiple approaches, though none is detailed.

Tags

# What is the market standard for pricing VIX futures?


# What is the market standard for pricing VIX futures?












Pricing of VIX futures is complicated, because it is not possible to use a standard hedging argument to get a value similar to stock futures.

What different approaches for pricing VIX futures exist? Which ones are used in practice by traders and others?

## Answer by glyphard (score 10)

https://quant.stackexchange.com/a/2533

The best theoretical model for pricing vix futures and options is a variance gamma model. However in practice that class of models is difficult to get robust results...

In practice, most floor traders in vix products base their hedging off of the SPX option chain. Vix is calculated from those options, in the first place, so this approach makes intuitive sense. Isolating the variance component of those the SPX options is straightforward using several approaches, and does not require much sophisticated numerical work.

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