Indeed, the VIX index is the most volatile and sensitive to the S&P500 index. 1 The VIX® methodology is the property of Cboe Options Exchange (Cboe). $\begingroup$ You have to linearly interpolate between two futures, one with maturity less than a month (the nearby VIX future) and one with maturity greater than a month (the second nearby). We compute the returns for constant maturity VIX futures returns following Eraker and Wu(2017)as rVF T,t+1 = w t F t+1(T 1) F t(T 1) + (1 −w t) F t+1(T 2) F t(T 2) −1, (1) Capturing the constant maturity volatilities helps traders visualize and track the behavior of volatility over time providing context to current market implied volatility. Documents about VIX ETFs explain this calculation in detail with examples. VIX Methodology The VIX Index is a calculation designed to produce a measure of constant, 30-day expected volatility of the U.S. stock market, derived from real-time, mid-quote prices of S&P 500 ® Index (SPX ℠) call and put options. We use a more complex modified version of this 30-day constant maturity as a filter signal among about eight others to reach trading decisions. Standard SPX options expire on the third Friday of each month and weekly S&P 500 options expire on every other Friday. Introduced in 2004 on Cboe Futures Exchange ℠ (CFE ®), VIX futures provide market participants with the ability to trade a liquid volatility product based on the VIX Index methodology.VIX futures reflect the market's estimate of the value of the VIX Index on various expiration dates in the future. The number of contract for the VIX futures is computed as the ratio of strategy fund to the price of the constant maturity one month VIX futures. 1 month time to maturity, UX2 for 2 months and so on. This index is an average yield on United States Treasury securities adjusted to a constant maturity of 1 year, as made available by the Federal Reserve Board. Let’s check in on how using this 30-day constant maturity indicator has performed in the last 3 years: This is another common indicator and a very useful one. For each maturity, put and call options are used to calculate the implied volatility. Volatility and Risk – Exploring and Contrasting the Effectiveness of VIX Futures as a Diversification Tool in Equity Portfolios Abstract We assess the effectiveness of CBOE volatility index (VIX) based futures index and related Exchange-traded products in reducing downside risk and providing tail risk protection to predominantly equity portfolios. $\begingroup$ You have to linearly interpolate between two futures, one with maturity less than a month (the nearby VIX future) and one with maturity greater than a month (the second nearby). More recently, several volatility-related Exchange Traded Notes (ETNs) have provided investors with equity-like long and short exposure to constant maturity futures on the VIX, and even dynamic combinations of long-short exposures to different maturities. The constant-maturity, floating-strike implied volatilities are then calculated by interpolation. As shown in Figure 14.4, VXX tends to perform poorly when it is paying the VRP while the VIX futures curve is upward-sloping ( in con- tango using futures parlance) and tends to perform best when it is receiving VRP while the curve is downward-sloping ( in backwardation ). DISCLAIMER: PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS AND ALL INVESTMENTS INVOLVE RISK. rolls continuously throughout the month to maintain a constant maturity and adjusts its holdings of VIX futures to maintain a constant vega exposure. Summary stats below include both the original and revised strategy. Volatility Index (VIX®) Futures. until expiry. As an illustration, the realized historic volatility is about 10% for Put strategy, 5% for Strangle strategy, and 50% for the VIX … If you would like an introduction, please read my answer to How does the VIX index and its related futures contracts work? Cboe has granted S&P Dow Jones Indices a license to use the VIX methodology to create the S&P 500 VIX Futures Index. These futures prices themselves start at roughly 30 and 60 days out (not exactly but close enough) and converge over time down to 0 days and 30 days at which time the front month expires and the 2nd month becomes the front month. Series is calculated as the spread between 10-Year Treasury Constant Maturity (BC_10YEAR) and 2-Year Treasury Constant Maturity (BC_2YEAR). If the VIX Index is above the 30-day constant maturity, this means the futures price will tend to rise as it converges towards the spot VIX and provides a tail wind for VXZ In this variation we look at comparing the VIX index to the 1-month constant maturity price of VIX futures. UNDER NO CIRCUMSTANCES DOES THIS INFORMATION REPRESENT A RECOMMENDATION TO BUY, SELL OR HOLD ANY SECURITY. VIX central is a very useful website that not only gives the VIX futures delayed quotes, but also shows the term structure—a graph of the VIX Futures for the various expiration dates vs time. The SPVXSTR tracks the performance of a position in the nearest and second-nearest maturing VIX futures contracts, which is rebalanced daily to create a nearly constant 1-month maturity. VelocityShares launched XIV in late November 2010. But on that day VXXB has 100% rolled over to the successor VIX futures contracts that have another 30 calendar days before they expire—so VXXB is really providing a weighted maturity volatility expectation of 60 days, not 30. When the strategies that we cover on our blog (including this one) signal new trades, we include an alert on the daily report sent to subscribers. Unlike the VIX index, the fixed-strike volatilities are model-dependent. Yields are interpolated by the United States Treasury from the daily yield curve. chart #2, 30-day constant maturity), it has been successful capturing the VRP that exists between the front month and spot VIX (graph #3) and between the second, front, and spot VIX … Strategy results trading XIV (inverse volatility) and VXX (long volatility) are in blue, compared to buying and holding XIV in grey, from mid-2004 to present: By 1-month “constant maturity” price I’m referring to the mix of first and second month VIX futures contracts that achieves a 1-month weighted average maturity. VIX central is a very useful website that not only gives the VIX futures delayed quotes, but also shows the term structure—a graph of the VIX Futures for the various expiration dates vs time. VIX measures market expectation of near term volatility conveyed by stock index option prices. 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