Calculation and mechanics
VIX futures trade on the CBOE Futures Exchange (CFE). Each contract has a specific expiry and is finally settled against a special VIX settlement value. Plotting the prices of the individual contracts over their expiries produces the VIX futures curve.
If futures prices rise with maturity, this is called contango. If short-dated contracts are more expensive than later ones, the curve is in backwardation. Contango is common in VIX futures, while backwardation tends to occur mainly in phases of sharply elevated short-term volatility.
Foliograph calculates the gap between each pair of neighbouring contracts in percent and in points. The value for the first and second monthly contract corresponds to the classic contango formula.
For rolling volatility products such as VXX the shape of the curve matters a great deal. Such products hold VIX futures and continuously shift their position into later contracts. If the next contract sits above the expiring one in contango, this produces a negative roll effect that can weigh on returns over longer periods. In backwardation the roll effect can be positive instead.
Contango % = (VX2 - VX1) / VX1 x 100
Distinction
The VIX/VIX3M ratio compares two volatility indices computed from SPX options with different time horizons. The VIX futures curve, by contrast, is based on actually traded futures prices for different expiries.
The IV Term Structure of an ETF also shows how priced-in volatility changes across maturities but is derived from the options of that ETF.
Sources
Related terms
- VIX (CBOE Volatility Index)
- VIX3M and VIX/VIX3M Ratio (CBOE 3-Month Volatility Index, formerly VXV)
- IV Term Structure (Volatility Term Structure)
- VVIX (CBOE VIX of VIX, volatility of volatility)
All market and analytical information is provided for educational and analytical purposes only and does not constitute investment advice or a trading recommendation.