Top 10 Questions About Volatility Investing

Thursday, November 28th, 2013 | Vance Harwood

Based on searches that lead people to Six Figure Investing, these are the top 10 questions people ask about volatility:

  1. How can I buy/trade/invest in the CBOE’s VIX® index?   The short answer is that you can’t.  No one has figured out how to do this economically.

    However, there are quite a few investment approaches that allow you to trade in volatility, including futures, options on futures, various Exchange Trade Products (ETPs), and options on ETPs.

    • VIX Futures.  The CBOE Futures Exchange offers VIX futures with expirations up to 9 months out.   Most of the time they trade at a significant premium to the current VIX value—the only firm exception is when a contract expires.   Even at expiration the VIX and the VIX futures can differ by a couple of percent.  For more on VIX futures see VIX Futures—Crystal Ball or Insurance Policy?
    • VIX options.  These are options on VIX Futures not the VIX index itself.  They are tied to specific futures months (e.g., November options are tied to November futures).  They are European exercise and expire on different days than regular stock/ETP options.  For more see Things You Should Know About VIX options.
    • VIX related ETPs (Exchange Traded Funds / Exchange Traded Notes).   All of these funds invest in VIX futures in some way or another in order to give the investor exposure to volatility.  They offer long funds, short funds, long/short, option hedged fund, and combinations with various equities.   For the complete list of USA volatility funds, associated websites, and volatility timeframes see Volatility Tickers.
    • VIX related options on ETPs.   Only 6 of the current 22 volatility funds have options available (VXX, VIXY, UVXY, SVXY, VXZ, VIXM).  For more on ETP volatility options see VXX Options.
  2. How can I go long on the VIX?  For going long on VIX using Exchange Traded Products see this post

  3. How can I go short on the VIX? For going short on VIX using Exchange Traded Products see How to Short The VIX,  for specific information on shorting VXX see How to Short VXX.  

  4. What is the best ETF / ETP for tracking the VIX?  All of them are pretty horrible at tracking the VIX index.  UVXY and CVOL are the least bad.  For more see Tracking the VIX Index.

  5. Why is the VIX moving with the S&P 500, instead of against it today?  Normally the moves of the VIX are negatively correlated to the general market, but around 20% of the time it moves in the same direction.

    The VIX index is based on the prices of options on the S&P 500 index (SPX), and sometimes the actions of those SPX option buyers/sellers are contrary to the general market mood.  For example if a big event (e.g., Fed announcement) occurred that reassured the investment community then option premiums might drop dramatically— even if the market was somewhat down for the day.  For more see How Much Should We Expect VIX to Move?

  6. Why are VIX Futures not tracking the VIX today? The VIX futures market is independent from the S&P 500 options market.   Sometimes these two markets have different opinions about what is going to happen.  Generally the prices of the VIX futures tend to trade at a 3% to 9% premium over the equivalent VIX value computed from SPX option prices.   For more see VIX Futures—Crystal Ball or Insurance Policy?

  7. Why are VXX, TVIX, and UVXY not tracking the VIX today?  VXX invests in the two nearest months of VIX futures, so it tracks the movements of the VIX futures not the VIX itself.  The same goes for TVIX and UVXY except they are 2x leveraged versions using  the same VIX futures.

    For other, more nuanced reasons why there are apparent discrepancies in the volatility ETPs see If you think your ETF is broken.  

  8. Why do VXX, TVIX, always go down?  They don’t go down all of the time— just 70% to 80% of the time.   Their appalling erosion is due to the typical price structure of the VIX futures, where  the prices you pay for the further out contracts are significantly higher than the short term futures.   Because of this the value of the futures that these funds hold  typically decline over time, much like option premiums decline.   Of course, if  volatility really spikes these funds will respond, but their moves will be muted compared to the VIX itself.  For more see The Cost of Contango—It’s Not the Daily Roll. 

  9. When do VIX options and Futures expire?    VIX options and VIX futures expire on the same day, the Wednesday immediately before or after the Friday expiration of regular options.   See here for a yearly calendar of VIX expirations.

    The CBOE selected this unusual date because it wanted the expiration for VIX futures to be exactly 30 days before the expiration of the next month’s SPX options.   Since SPX options expire on the 3rd Friday of the month—which can be as early as the 15th or as late as the 21st, the VIX future’s date has to jump around to satisfy the 30 day requirement.   For more see Calculating the VIX  and VIX Timescape

  10. How low can the VIX go?    The record low close for the index was 9.31 on December 22nd, 1993.   It rarely drops below 10.   The most recent close below 10 was 9.89 on January 24th, 2007.


VIX-histo-a More questions?  Checkout the 40 volatility related posts I’ve indexed on the right side of  this page.

Graphical Representation of CBOE’s VIX Calculation

Friday, January 17th, 2014 | Vance Harwood


The dynamically updated chart above uses delayed quotes from Yahoo Finance.  It details the interpolation / extrapolation process that computes the 30 day VIX from two close-in months of SPX options (VIN and VIF). For more information on that process see Calculating the VIX—the Easy Part.  VXST is the CBOE’s 9 day version of the VIX, and  VXV is the CBOE’s 93 day version.

Recently the CBOE started providing  the VXST index, which gives a 9 day estimate of volatility.  It uses the standard VIX methodology, but uses soon-to-expire SPX options (SPXPM, and SPX).   In the chart / data above I show the 20 minute delayed VXST.

There are two somewhat parallel markets associated with general USA market volatility: the S&P 500 (SPX) options market and the VIX Futures market.  SPX option prices are used to calculate the CBOE’s family of volatility indexes, with the VIX® being the flagship.  VIX futures are priced directly in expected volatility for contracts expiring up to 9 months out.  The nearest VIX Future synchronizes with the VIX once a month—on its expiration date.

Additional resources:

Calculating VIX—the Easy Part

Saturday, April 5th, 2014 | Vance Harwood

The movements of the CBOE’s VIX® are often confusing.  It usually moves the opposite direction of the S&P 500 but not always.  On Fridays the VIX tends to sag and on Mondays it often climbs because S&P 500 (SPX) option traders are adjusting prices to avoid paying for time decay over the weekend.

In addition to these market driven eccentricities the actual calculation of the VIX has some quirks too.   The VIX is calculated using SPX options that have a “use by” date.   Every month, on the morning of the 3rd Friday, the current month’s options expire.  This schedule of expirations forces the VIX calculation to periodically switch to longer dated options.

The VIX provides a 30 day expectation of volatility, but the volatility estimate from SPX options changes in duration every day.  For example, on May 1, 2013 the May SPX options, expiring on the  17th, provide a 16 day estimate of volatility, while the June options, expiring June 21st provide a 51 day estimate.   To get a 30 day expectation the VIX calculation uses a weighted average of the volatility estimates from two months—in this case May and June options.

The full blown S&P 500 VIX calculation is documented in this white paper.  It computes a composite volatility of each month’s options by combining the prices of a large number (> 100) puts and calls.  The CBOE publishes the result of these intermediate calculations as VIN for the nearer month of SPX options (not necessarily the nearest), and VIF for the further away options at one minute intervals.  These indexes are available online under the following tickers:

  • Yahoo Finance as ^VIN, ^VIF
  • Schwab $VIN, $VIF; historical data available
  • Google Finance INDEXCBOE:VIN, INDEXCBOE:VIN; historical data available
  • Fidelity:  no coverage

Using the VIN and VIF values in a  30 day weighted average calculation the final VIX value is determined.    Graphically this calculation looks like the chart below most of the time:

Calculation Date 1-May-2013

Calculation Date 1-May-2013


In this example the VIX value for May 1st is computed by averaging between the May SPX options (VIN) and the June SPX options (VIF) to give the projected 30 day value.   Clearly the averaging algorithm used by the CBOE is not just a linear extrapolation between VIN and VIF; I provide details on this calculation later in the post.

Options can be flaky in their last week, so when the VIN options are less than 7 days from their expiration the algorithm switches to the next pair of months.  The next chart shows the calculation right before the switch.

VIX calculation right before month switch

VIX Calculation 10-May-2013


The chart below shows the calculation on the next trading day when VIN switches to June options and VIF uses July options.  Notice how the green VIX bar is now to the left of the blue VIN bar.

Calculation Date: 22-May-2013

Calculation Date: 13-May-2013


The VIX calculation is now outside the VIN / VIF values—an extrapolation.  If the term structure of the June / July options is significantly different than the May/June offering the resultant VIX value can jump significantly during this switch.  While the VIX calculation is in this extrapolation mode I suspect that the VIX’s weekend effects are stronger because any change in the VIN options will whip the VIX value around.

The chart below shows the special case situation of the VIX’s monthly expiration:

VIX Calculation 22-May-2013 -- Expiration

VIX Calculation 22-May-2013 — Expiration


On the Wednesday morning of VIX expiration the VIN SPX options are exactly 30 days from their expiration.  The result is that VIX = VIN and the special opening quotation SOQ and resultant final settlement value VRO only concern VIN options (June SPX in this example).    It doesn’t matter if an earlier series of SPX options hasn’t expired yet—they’re not included in the VIX calculation.

If you want to compute the VIX yourself using the VIN and VIF values you can’t just do a linear interpolation / extrapolation because volatility does not vary linearly with time.  Instead you have to convert the volatility into variance, which does scale linearly with time, do the averaging, and then convert back to volatility.  The equation below accomplishes this process.


The SPX options used for VIX calculations expire the 3rd Friday morning of the month at 9:30ET.  See Trading SPX/SPXPM options  for more information.

The Volatility Landscape—May 2013

Friday, May 3rd, 2013 | Vance Harwood


  • CBOE
    • The CBOE plans to extend VIX® Futures trading by over 5 hours—aligning with the London Stock Exchange open, and adding a 45 minute post settlement trading period 4:30 ET to 5:15 ET Monday through Thursday.
    • Two new volatility indexes, DLVIX and DSVIX are documented on the CBOE website.   These indexes were developed in cooperation with the French bank Société Générale and are now being used with two new European ETFs.   A quick look suggests these indexes switch VIX futures allocations based on term structure and VIX momentum.
    • Volume in VIX Futures continues to surge to record highs with April’s volume climbing 26% higher than March.  The year to year volume growth was 141%.   The chart below shows the open interest on the nearest 2 and the mid-term 4th through 7th month VIX Futures.


  • VIX Central improved its historical VIX Futures term structure graphs by switching the time axis from contract months to time to expiration.   This change greatly reduces the chances of misinterpreting term structure differences across contract expiration boundaries.  See this post for more information.
  • For the first time an inverse volatility fund—VelocityShares’ inverse short term volatility ETN XIV has taken second place in overall volatility fund assets under management (AUM) with $440 million.  The leader, Barclays’ VXX has $1.15 billion.  Third place goes to ProShares’ UVXY 2X short term volatility ETF with $344 million.  For more on inverse volatility see this post.
  • Yahoo finance now reports Exchange Traded Product (ETP) AUM as net assets in their standard quote information and has made some other information available (e.g. shares outstanding, total cash) with special tickers.   The topics and example tickers shown below for SPDR’s JNK:
    • Intraday Indicative Value   ^JNK-IV
    • Shares Outstanding   ^JNK-SO
    • Net Asset Value ^JNK-NV
    • Estimated Cash ^JNK-EU
    • Total Cash  ^JNK-TC
  • I recently found out about the Quandl data resource—a free source of downloadable price data  futures, stocks, rates, currencies, commodities; macro-economic data from FRED, BEA, DOE, Census, USDA, WB, UN, OECD; demographic and society data; and corporate financials.  There’s a lot of good stuff there.



  • With both UVXY and TVIX trading well below $10 per share the question of upcoming reverse splits has returned.
    • I expect ProShares to reverse split UVXY 10:1 in May or June—they don’t want to lose the momentum that they have built up.
    • The last time around (December 2012) Credit Suisse waited until TVIX had dropped below $1 per share before doing a reverse split.  With $188 million in assets, I doubt they’ll let this product fade into oblivion, but given their track record of procrastination I’m guessing we won’t see a reverse split until TVIX is South of $1—perhaps in October / November.


White Papers

  • Easy Volatility Investing” by Tony Cooper
    • This paper took 2nd place in the National Association of Active Investment managers’ (NAIIM) recent Wagner Award contest.   It provides a good overview of volatility trading and then does a thorough evaluation of 5 different trading strategies for volatility products: buy & hold, momentum, roll yield, volatility risk premium, and hedged.
  • Option traders use (very) sophisticated heuristics, never the Black-Scholes-Merton formula”   Haug & Taleb
    • I hadn’t seen this 2009 paper until recently.  Taleb claims that the practical impact of the Nobel Prize winning work of Black-Scholes-Merton on the options markets is significantly over emphasized.  He argues that structural relationships like put / call parity and compatibility between options combinations at various strikes (e.g., no negative butterflies) are the true forces setting options prices.
  • Volatility Trading: Trading Volatility, Correlation, Term Structure and Skew” Bennett & Gil
    •  Over 200 pages of wide ranging information—from covered calls to exotic options, to links between CDS spreads and implied volatility.  Something for everyone.



  • I’ve added Citi Group’s CVOL and Barclays’ XVZ to my “Not recommended” list of volatility funds.
    • CVOL’s assets under management have dropped to $2.2 million and its bid/asked spreads are very wide.  Its strategy of trying to track volatility is sound, and their contango losses are less than UVXY or TVIX, but it’s just too small.
    • The intent of Barclays’ XVZ was to create a fund that was long volatility, but could be held during quiet times without losing much if any money.  XVZ attempted to do this by hedging a position in medium term volatility products with a short position in short term volatility.  Unfortunately for XVZ, the VIX Future term structure shifted about the time the fund was introduced in such a way that the hedging didn’t work and it has lost 30% in the last year.  XVZ might do OK during times of high volatility, but until it establishes some sort of track record in that environment I’d recommend staying away.   For more on XVZ there’s a good article “The Hedge That Wasn’t” posted by Season Investments.

VIX Futures—Crystal Ball or Insurance Policy?

Monday, June 3rd, 2013 | Vance Harwood

Many people seem to believe that the CBOE’s VIX Futures market is attempting to predict upcoming CBOE VIX® values.  I think they are mistaken.   Most futures prices have very little to do with predicting the future.

Futures contracts were invented to allow producers/consumer of commodities to limit their business risk by locking in future prices.  In exchange for eliminating price risk they give up the potential for increased profits if markets later moved in their favor.  Traders wasted no time using futures for speculation, not because they somehow foretell the future, but rather because the low margin requirements for futures allows them to heavily leverage their bets.

Prices for futures contracts are constrained by arbitrage.  For example, if an arbitrager sees the premium for Dec 2013 E-mini S&P 500 futures rise above a certain point they will short E-mini contracts and buy the appropriate amount of stocks in the S&P 500 (or just short SPY).  From this point on they don’t care what direction the market moves—they are perfectly hedged—a risk free position.  The transaction is triggered when there is sufficient difference between the current S&P prices (the “spot” price) and the December contract bid price to compensate for their cost of capital to buy the stocks, account for dividends, and deliver the target profit.  Alternatively, if they think the futures price is too low, they reverse the transaction, buying the future and shorting the S&P 500.   Companies will differ in how much premium they require between the spot price and the futures price but the net effect is that E-mini prices trade between these boundaries—they aren’t a divination of the S&P 500’s value in December 2013.

For physical commodities like corn or natural gas the cost of storage is included in the futures pricing and in some cases seasonality.   For example, prices for corn might be depressed during harvest time because some producers want to move the product directly to market so they don’t have to store it.

Arbitrage for VIX futures is a much trickier thing.  You can’t buy volatility on the spot market and store it in your garage for a few months.  The best you can do is buy or sell the appropriate set of S&P 500 (SPX) options—the ones that expire 30 days after the settlement date, and eventually subject yourself to the settlement process.  Settlement is via the tweaky Special Opening Quotation (SOQ) process, which can’t even tell you ahead of time the full set of options that will be used for the settlement and in the last year has differed from the VIX opening price by as much as +4.27% / -3.8% on the morning that VIX Futures settle.

Contiguous SPX options are only available for the next 4 or 5 months, so the options associated with further out VIX futures expirations (up to 9 months out) are sometimes not even available.   Clearly market makers in VIX Futures must have other ways to hedge their positions (e.g., VIX futures spreads, VIX options, calendar spreads of SPX options).  In fact with the recent CBOE announcement of plans to start VIX futures trading 5 hours earlier than the current 8:15 ET, to coincide with European trading hours it appears they don’t even need the S&P 500, SPX options, or the VIX  to operate their market—at least for a few hours.

A quick look at historical data suggests that VIX futures tend to trade at a 3% to 9% premium to the VIX level of their associated SPX options.  A chart with April 10, 2012 and April 11, 2013 data is shown below:

Since the notional value of the SPX options market is currently much bigger than the VIX futures value it is reasonable to assume that the VIX futures tail does not wag the SPX options dog.   So the question becomes, what sets SPX options prices, and indirectly their implied volatility?  Are the market participants seers or are there other factors at work?

First of all, by any measure SPX option implied volatility is terrible at predicting future volatility in any way other than general reversion to mean.  If current volatilities are very low they predict an increase in volatility, if really high they predict it will drop.  Short term they predict that tomorrow will be like today—brilliant…

Insurance is a better model for predicting SPX option prices.  Investors use option strategies for price protection (e.g., fully hedge any market moves below a certain price), and as assets that reliably go up during serious market corrections or panics.  Even if your puts aren’t in-the-money, they still go up a lot when volatility spikes.

An insurance company doesn’t try to predict when you will have losses on your house or car.  It looks at the statistics and then charges a constant monthly rate they believe in aggregate will cover the claims they receive and over time deliver a reasonable profit.   I think the VIX Futures market looks a lot like an insurance provider.

Two final notes:

  • VIX Futures do have one seasonality pattern —the Christmas effect.  Typically December VIX futures are slightly cheaper than the surrounding contracts because volatility around that time tends to be low—a lot of people are on vacation, and the market is closed for several holidays
  • The VIX Futures term structure chart during quiet markets has gotten more linear in the last couple of years.  This shift has dramatically increased the contango in the mid-term futures—much to the chagrin of the XVIX, VXZ, and XVZ ETNs. On the other (inverse) hand ZIV is a happy camper.   Eli, from VIX Central speculates the curve straightened because there used to be a low risk trade of shorting a VIX future month right before it started sliding down the steeper portions of the curve, while being long the month after it as a hedge.  This trade might have just gotten crowded or perhaps the increased volume in the later month futures driven by the volatility ETPs made the market more competitive.