What VIX Investors Must Know

The VIX is the implied volatility for the next 30 days on index option contracts of the S&P 500. Figure 1 shows the VIX, in the summer of 2003, flirting with extreme lows, dipping to near or below 20. A look at Figure 2 should be an eye opener, as it shows that each time the VIX has declined below 20, a major sell-off has taken place shortly after.
Because the VIX aims to measure market sentiment, it works out how much people are willing to pay to buy options on the stockmarket, and because it is viewed as a measure of 'fear' this would usually represent the price of put options to protect against declines.



The underlying S&P 500 VIX Short-Term Futures Index Total Return offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index.
Risk Warning: Stocks, futures and binary options trading discussed on this website can be considered High-Risk Trading Operations and their execution can be very risky and may result in significant losses or even in a total loss of all funds on your account.

Because of this, VIX futures are very large contracts that should be traded cautiously, especially since the margin requirement to trade one contract can be as low as a few thousand dollars (the margin will vary depending on the brokerage firm and market volatility).
This is the result of mean-reversion; futures will move up more when the VIX is below its long-term average and less if it is above it. If the parameters indicate that futures are strongly mean-reverting, delta will be smaller because the current level matters less than its long-term level; if mean-reversion is weak, the delta will be greater because futures will be more sensitive to the current index level.
Since the Chicago Board Options Exchange (CBOE) introduced futures and, subsequently, options on its Volatility Index, or VIX, traders vix futures term have asked why the contracts don't necessarily track the underlying in the same way other equity futures track their indexes.