Beginner question about VIX futures

D

Derrenoption

Hello,

I have a beginner question for futures on the VIX. I have found the below example info.

Pricing –
Mini-VIX
June VIX – VMM0 @ 26.90 = $2,690.
Minimum price move = .05 or $5.
+/- 1.00 price change = +/- $100.

As I then understand if VIX moves up/down 1$, the futures contract will move $100/-$100.
What I wonder is the real basic of how you actually buy and sell a futures contract.

1. Suppose, VIX index is at $10. What is then the price of the closest Future contract?
2. Do we buy them at strike prices as we do with options?
3. And has futures a linear pricing/delta 1 as stocks have to expiration?
 
I'm going to do you a favor, and shortcut you a bit.

Google "VXX" and "contango" as your next move.

Or, "VXX" "contango" and "Russell Rhoads"....

Keep your money in your pocket.
 
Yes I have googled this and wathing videos for sometime but never get a good example of what I wonder about.

The simple question would be for me to get the first understanding?

1. Assume VIX is at price $15 now. In 20 days we reach expiration.
2. So now I like to buy a futures contract and hold that to expiration. At what price do we buy a "Mini-VIX" futures contract now?
3a. What will that contract be worth if VIX is at $ 20 at expiration?
3b. What will that contract be worth if VIX is at $10 at expiration?
 
Derrenoption said:
Yes I have googled this and wathing videos for sometime but never get a good example of what I wonder about.

The simple question would be for me to get the first understanding?

1. Assume VIX is at price $15 now. In 20 days we reach expiration.
2. So now I like to buy a futures contract and hold that to expiration. At what price do we buy a "Mini-VIX" futures contract now?
3a. What will that contract be worth if VIX is at $ 20 at expiration?
3b. What will that contract be worth if VIX is at $10 at expiration?
More...

Let's use real prices as that will make this easier.

Current cash VIX (which you can't trade) is 11.54.
The future that expires in 25 days is the G contract. VXG is currently 13.85 offered.

It's $50 a tick. A tick is .05. So there are 20 ticks to a point. That means each point is $1000.

It's very important to understand that the VIX cash uses a mathematical formula to approximate a 30 day strip of SPX Vol. Every day that rolls by one day to maintain a constant 30 day term structure. The futures contracts do NOT trade with the VIX. They are "expectations" of what that 30 day strip will be worth on that expiration day. So on expiration, what will the forward 30 day cash vix be worth? These two will converge ONLY on that day. When vol is low the market will always be pricing higher vol forward so that expectation goes into the forward pricing curve.

This means the only way you can make money on this future is not by buying cheap vol, but by buying vol that will move more then the market is expecting. Everyone is expecting higher vol. Vol has to move MORE then those high expectations.

One more thing. You need to understand that VX futures move relatively slowly especially compared to cash vix. The reason is because forward expectations are already priced in at a premium. But the cash vix will change daily based on the actual formula. So if VXG is at 13.85, it would take a gigantic move to get VXG to move to 20. In fact, it's possible for cash vix to go to 27 let's say and VXG might move up to 16.00.
 
Maverick74 said:
This means the only way you can make money on this future is not by buying cheap vol, but by buying vol that will move more then the market is expecting. Everyone is expecting higher vol. Vol has to move MORE then those high expectations.
More...

"Hello!"




(Just thought that deserved a bit of emphasis.....)
 
One more thing. You need to understand that VX futures move relatively slowly especially compared to cash vix. The reason is because forward expectations are already priced in at a premium.
More...

Thanks for answer!
Yes, I also saw that the future was priced at 13.85 while the VIX is at 11.54 and the premium is at 2.34.
So it seems that the premium is priced in in that way then?
 
Derrenoption said:
Thanks for answer!
Yes, I also saw that the future was priced at 13.85 while the VIX is at 11.54 and the premium is at 2.34.
So it seems that the premium is priced in in that way then?
More...

Think of it this way. If you were a market maker and you HAD to provide a firm offer (meaning a price you will honor and won't back away from", where would you offer VXG that expires 25 days from now? I know you wouldn't be offering 11.54. How high would you offer?
 
No, what I meant was, pretend there were no futures and your neighbor said, hey Der, make me an offer on a 25 day Vix market. You could say anything, say, I'm 25 offer, 30 offer, 15 offer, whatever. What would you offer. In 25 days you would have to pay out to your neighbor the price difference between your offer price and the VIX settlement price in 25 days. What price would you offer out?
 
I just got my drivers license - can anyone point to Daytona or Indianapolis or maybe Monte Carlo?

Well actually it's just a learner's permit but still .........
 
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