VIX Index vs VIX futures 101.
The VIX futures contracts are a market traded contract which prices investors expectations of future volatility. The VIX a index does this too. But it is not trade-able directly and has a built in calculation problem.
The VIX futures contracts are a market traded contract which prices investors expectations of future volatility. The VIX a index does this too. But it is not trade-able directly and has a built in calculation problem.
That problem exists because individual options contracts (which are market traded which is good) have a similar data problem that shows up in the calculated VIX index
What's the problem. Well the price/premium of options are priced by the market. The implied volatility is a calculation! The IV is not what is traded. The price is traded. So what happens on fridays and mondays
Let's say we are looking at a 28 day option on SPX on Friday. It's implied volatility is calculated using 28 days. On Monday it's IV is calculated using 3 less days. Assuming you are calculating the vol at the same time. Or 2.6 ish days less if calculating at the open.
The problem is that all days are not created equal. The market sets the price on Friday's close knowing that there is likely less market moving news over the weekend than what would happen during the week. The options premium reflects these less newsworthy days on Friday's close
The implied however is calculated assuming all days are the same. This results in an iv calculation that is lower due to the options premium being priced for less than the calendar says
On Monday the calendar and the future 25 days are back in sync. And options premium have decayed as if they had had less than two full days of decay. That means the calculated iv rises all else being equal
VIX uses those iv's to calculate the index and the futures don't. Use the futures!
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