Understanding VIX Futures Term Structure and Basis
Summary
The article explains why VIX futures can trade at premiums or discounts to the VIX index and examines how the futures curve changes with market conditions. It introduces a cash-and-carry comparison: futures require less cash than a stock purchase, leaving cash available to earn interest, while stocks may pay dividends that futures do not. This interest-versus-dividend relationship helps explain futures premiums or discounts in the example, though VIX futures have their own settlement and volatility-risk features.
Historical term structures and VIX observations illustrate a typically upward-sloping curve on a quiet day and a downward-sloping curve during a severe volatility shock. The article notes that the VIX index tends to show sharp upward moves, local mean reversion, and a possible lower bound, but stresses that traders cannot directly trade the index. Those tendencies may already be reflected in futures prices: long exposure can face a premium in calmer conditions, while short exposure can be costly during stress. It offers a directional volatility idea based on relative short- and longer-term implied volatility, without providing a tested trading rule or performance evidence.
Key ideas
- VIX futures usually trade on a term structure that can slope upward or downward.
- Interest income and stock dividends help explain futures premiums or discounts in a cash-and-carry comparison.
- VIX index behavior does not translate directly into a tradable signal because futures prices may already reflect it.
- The article suggests comparing short-term with longer-term implied volatility but gives no validated entry, exit, or risk rules.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.