Understanding VIX Futures and Options

Derivatives

Table of Contents
Question 1.............................................................................................................................................2
Question 2.............................................................................................................................................3
Question 3.............................................................................................................................................4
References.............................................................................................................................................6
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Question 1
VIX futures were being introduced by Cboe Futures Exchange which provides participants of
the market with the ability of trading volatility product on the basis of the VIX index
methodology. The VIX futures show the estimate of the market value of VIX index on
different expiration dates in future. Thus, VIX futures provides participants of the market
with wide variety of opportunities of implementing their ideas by applying volatility trading
strategies which consist of portfolio diversification, alpha generation and risk management
(Dzekounoff, 2010). Weekly and monthly expirations in the VIX futures are being available
and traded nearly 24 hours per day and five days a week. VIX index is being estimated and
disseminated in a day which provides participants of the market with the information on the
real-time volatility whenever news displays. VIX weekly futures started trading in 2015 on
CFE and provided the participants of the market with the opportunities of establishing short
term VIX position and manage the timing of their trading and hedging activities. For futures,
weekly expirations are listed generally on Thursday and on Wednesday it expires. VIX
weekly futures have similar contract specifications as the expiring monthly VIX contracts
(Huang, Tong and Wang, 2018).
The process of VIX index settlement is structured after the settlement of the S& P 500 index
options process. The final settlement of VIX options and futures value is estimated on the
morning of the expiration date through the special opening quotation of the VIX index by
applying the opening price of the portfolio of the SPX options which expires after 30 days
(Huskaj and Nossman, 2012). The option's opening prices are estimated through a proprietary
auction mechanism of Cboe. The participants of the market are provided with the mechanism
of purchasing and selling SPX options at prices that are being used to estimate the final
settlement of VIX derivatives value and the settlement process of VIX index is tradable.
VIX futures are considered to be an effective tool of diversifying portfolios, equity hedge
returns and spreading realized versus implied market volatility. It also enables the speculators
of the market to trade volatility which is independent of the level of the stock prices or of the
direction. VIX futures are futures standard contracts on 30 day forward implied volatilities of
S&P 500 index.VIX futures are generally being cash settled and not like the futures on the
commodities that have no physical delivery (Sinclair, 2013). The account of the market
participants on the date of the settlement would simply be debited or credited on the basis of
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