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Volatility futures

Futures on the forward value of the volatility index; the only direct way to trade VIX, and the building block of every volatility ETP.

Because the index itself cannot be held, exposure runs through futures that settle to a special opening calculation on their expiration date. Each contract prices the market's expectation of where the 30-day volatility index will be on that future date, which is why the futures curve is usually far above a low spot reading and below a high one.

That curve shape is the whole trade. In calm markets the curve is in contango, so a long position bleeds as each contract rolls down toward spot; in stress it flips to backwardation and the bleed becomes a tailwind. Anyone holding volatility exposure for more than a few days is trading the curve, not the index.

Example: spot volatility index at 15, the front future at 17 and the second month at 18.5. Holding the front contract for a month, with the index unchanged, costs roughly two points as it converges to 15. That is the structural cost behind every long volatility product.

Related: vix, vix-futures-curve, vix-roll-yield, volatility-etp

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Contango and backwardationTwo futures curves against contract expiry: one rising above spot, one falling below it.The same commodity, priced for delivery at different dates.78.0076.0074.0072.0070.00Futures pricespot+1m+2m+3m+4m+5m+6mMonths until the contract expiresspot price74.00CONTANGOlater contracts cost more than spotBACKWARDATIONlater contracts cost less than spot
Contango and backwardation. A futures curve shows what buyers will pay for delivery in one month, two months and so on. When later contracts cost more than the spot price the curve is in contango; when they cost less it is in backwardation.

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