VIX Index Characteristics: Why Volatility Products May Provide Unique Hedging and Income Strategies

November 23, 2020

This article was prepared in connection with the launch of Mini Cboe Volatility Index (Mini VIXTM) futures on Cboe Futures Exchange, LLC (CFE). Before you trade Mini VIX futures, it's important to understand the following:

  • Mini VIX futures are complicated financial products that are suitable only for sophisticated market participants.
  • Mini VIX futures involve the risk of loss, which can be substantial and can exceed the amount of money deposited for the futures position.
  • Market participants should put at risk only funds that they can afford to lose without affecting their lifestyles.
  • Before transacting in Mini VIX futures, market participants should fully inform themselves about the characteristics and risks of Mini VIX futures, including in particular those described below. Mini VIX futures market participants also should make sure they understand the product specifications and the methodologies for calculating the underlying VIX® Index and the settlement values for Mini VIX futures.

Inverse Relationship with S&P 500

Groundbreaking products, like VIX futures and options, often have unique characteristics that appeal to market participants. In many ways, volatility exposure has become a new asset class. Volatility, by definition, is directionally agnostic with upper and lower bounds, as well as having other traits that may allow for unique investing strategies and opportunities.

Generally, the VIX Index tends to have an inverse relationship with the S&P 500 Index. This negative correlation has earned the VIX Index the "fear gauge" moniker because VIX Index has a tendency to move up quickly when the broad market declines with velocity.

Expected volatility typically increases when markets are turbulent, or the economy is faltering. In contrast, if stock prices are rising the VIX Index tends to fall or remain steady at the low end of the scale. Source: Cboe

The inverse correlation of the VIX Index makes the tradeable futures and options contracts potentially attractive risk management or hedging vehicles. The negative correlation tends to improve (become more negative) during periods of meaningful macro duress (e.g. 2008 and 2020).


As a forward-looking indicator, the VIX Index also tends to be mean reverting; over time it will generally return or move back to its historical average. Volatility cannot move higher in perpetuity. It also cannot move to zero, which is distinct from equities. Volatility is a constant. It oscillates in a wide range around a mean (which changes over time). This inherent dynamic does not lend itself to buy-and-hold strategies.

Source: Cboe

Term Structure

The relationship between contract prices of different expiries is known as the product's term structure. It can be described by its shape as being in contango (near term is priced lower than longer term) or backwardation (near team is priced higher than longer term). Since 2007, the VIX futures term structure has been in contango (front month future at a discount to second month future) during approximately 80% of the daily observations1, including those on February 19, 2020. However, when market expectations for near-term volatility rise, the term structure can shift into backwardation as it did during the market decline in March 2020.

1. CFA Institute, 2020, "The VIX Index and Volatility-Based Global Indexes and Trading Instruments"

Additional Information before you trade Mini VIX futures:

  • Underlying Index: Mini VIX futures are based on the VIX Index, which is a financial benchmark designed to be a market estimate of expected volatility of the S&P 500®. The VIX Index is calculated by using the midpoint of quotes of certain S&P 500 Index options. (More information on how the VIX Index is calculated is available here and here.)
  • Not Buy and Hold Investment: Mini VIX futures are not suitable to buy and hold because:
  • On their settlement date, Mini VIX futures convert into a right to receive or an obligation to pay cash.
  • The VIX Index generally tends to revert to or near its long-term average, rather than increase or decrease over the long term.
  • Volatility: The VIX Index is subject to greater percentage swings in a short period of time than is typical for stocks or stock indices, including the S&P 500 Index.
  • Expected Relationships: Expected relationships with other financial indicators or products may not hold. In particular:
  • Although the VIX Index tends to be negatively correlated with the S&P 500 Index-such that one tends to move upward when the other moves downward and vice versa-that relationship is not always maintained.
  • The prices for the nearest expiration of Mini VIX futures tend to move in relationship with movements in the VIX Index. However, this relationship may be undercut, depending on, for example, the amount of time to expiration for the Mini VIX futures contract and on supply and demand in the market for those futures.
  • Mini VIX futures contracts trade separately from regular-sized VIX futures, so the prices and quotations for Mini VIX futures and regular-sized VIX futures may differ because of, for example, possible differences in the liquidity of those markets.

This article also addresses Cboe Volatility Index (VIX®) options offered for trading on Cboe Exchange, Inc. (Cboe Options) and regular-sized VIX futures offered for trading on CFE. In addition to the above, it's important to understand the following before you trade VIX options and VIX futures:

Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of "Characteristics and Risks of Standardized Options." Copies are available from your broker or from The Options Clearing Corporation at 125 S. Franklin Street, Suite 1200, Chicago, IL 60606 or at Futures trading is not suitable for all investors and involves the risk of loss. That risk of loss can be substantial and can exceed the amount of money deposited for a futures position. You should, therefore, carefully consider whether futures trading is suitable for you in light of your circumstances and financial resources. You should put at risk only funds that you can afford to lose without affecting your lifestyle. For additional information regarding futures trading risks, see the Risk Disclosure Statement set forth in Appendix A to CFTC Regulation 1.55(c) and the Risk Disclosure Statement for Security Futures Contracts.

Cboe®, Cboe Global Markets®, CFE®, Cboe Volatility Index®, and VIX® are registered trademarks and Cboe Futures ExchangeTM and Mini VIXTM are service marks of Cboe Exchange, Inc. or its affiliates. Standard & Poor's®, S&P®, S&P 500®, and SPX® are registered trademarks of Standard & Poor's Financial Services, LLC, and have been licensed for use by Cboe Exchange, Inc. Any products that have an S&P Index or indices as their underlying interest are not sponsored, endorsed, sold or promoted by S&P OPCO LLC ("Standard & Poor's"). All other trademarks and service marks are the property of their respective owners. © 2020 Cboe Exchange, Inc. All Rights Reserved.