We got a good question yesterday in the Your Questions Answered section about VIX options in September expiry. Here was the question and response:
Thanks for all of your help… I was just wondering any thoughts on the VIX trade , its been up the last two days, 5%, and now another 6%, but the butterfly is down.
VIX options will mark-to-market differently than most vanilla options positions because their value is derived from VIX futures rather than VIX spot. As a result, while VIX spot is near 2 week highs, September VIX futures are close to where they closed on Thursday, August 16th, which is why the VIX trade has not moved much since initiation. The Sept VIX options will start to move more with VIX spot as Sept expiry gets closer in time.
I thought it would be useful to start publishing the VIX futures contracts prices periodically to give all of you a sense for how VIX futures change in relation to each other, to VIX spot, and the stock market.
For today’s inaugural post on the topic, here is the current VIX futures contract table (August futures expired today, so the first futures contract is September):
The steep nature of the futures term structure is evident (this is why we generally recommend VIX calls instead of VXX calls, which get hurt by this steepness). So anyone long VIX Sept calls is exposed to the VIX Sept contract, which is currently trading around 18.90. Though VIX spot and VIX futures usually move in the same direction, that is not always the case, especially with the term structure this steep. So watch the Sept VIX futures contract for a better sense of how your VIX Sept calls are reacting.
Here’s a great resource from the CBOE to keep an eye on the futures prices.
August VIX futures and VIX options expired on the open today. That means that the settlement price to determine all of the values for VIX futures and VIX options is based on where VIX spot opened at 9:30 am this morning. So if you were long the Aug VIX futures contract at 18 (you bought it at 18), and the settlement price on the open this morning was 15.30, you would have lost the difference, or 2.70 (you would have made the difference if you sold that same VIX futures contract at 18). As a result, eventually, VIX spot and VIX futures converge on expiry, but a lot can happen in the interim.
In future posts, I’ll get into more detail about how traders interpret this futures steepness, and how and why it tends to shift based on market moves.