In this article, Saral BINDAL (Indian Institute of Technology Kharagpur, Metallurgical and Materials Engineering, 2024–2028; Research Assistant at ESSEC Business School) examines the characteristics, pricing, and settlement of VIX futures and options, along with their term structure and market microstructure.
Introduction
The Cboe Volatility Index (VIX) is a real-time measure of the market’s expectation of S&P 500 volatility over the next 30 days. It is calculated from the prices of S&P 500 Index (SPX) options and is expressed as an annualized percentage. The VIX is widely used as a measure of expected market volatility. For more details, see the previous posts on Implied Volatility and Option Prices and Cboe Volatility Index.
The VIX itself is an index and cannot be directly bought or sold. To allow market participants to trade volatility, Cboe introduced VIX derivatives such as futures and options. VIX futures were introduced in 2004, followed by VIX options in 2006. VIX futures provide linear exposure to changes in the market’s pricing of the future level of the VIX Index, while VIX options provide nonlinear exposure, allowing investors to take positions on changes in the VIX through a range of strike prices and maturities.
VIX Futures
A VIX futures contract is a standardized agreement whose value is linked to the VIX Index at a specified future date (expiration date of the contract). A VIX futures contract reflects the market’s pricing of the VIX Index at a specified future expiration date. Its price incorporates expectations about future volatility as well as risk premia and therefore should not necessarily be interpreted as an unbiased forecast of the future VIX level. VIX futures are traded on the Cboe Futures Exchange (CFE) under the symbol VX.
The pricing of VIX futures differs from that of conventional futures on a tradable stock or stock index. For a stock, the futures price can be related to the current spot price through a cash-and-carry arbitrage relationship, typically expressed as F0 = S0e(r-q)T, where r is the interest rate and q is the dividend yield. This relationship relies on the ability to buy and hold the underlying asset. In contrast, the VIX is an index and cannot itself be directly bought or held. Therefore, the VIX futures contract does not simply represent the current VIX value carried forward to a future date. Instead, it is a market price determined by participants’ expectations about future volatility (the expected value of VIX at maturity), together with the supply and demand for volatility exposure and the risk associated with holding the contract.
VIX futures have a $1,000 contract multiplier. Therefore, a one-point change in the price of a VIX futures contract corresponds to a $1,000 change in the value of one contract.
For example, if an investor buys one VIX futures contract at 20 and its price subsequently rises to 23, the change of 3 VIX points corresponds to a gain of:
before transaction costs and any financing or opportunity costs associated with margin requirements.
Transaction Costs
Trading VIX derivatives involves both explicit (commissions and fees) and implicit (price impact) transaction costs. These affect the cost of entering and exiting positions and, ultimately, strategy performance. These costs can be broken down into the following components:
Brokerage commissions: Fees charged by brokers for executing trades.
Exchange transaction fees: Fees levied by the exchange on executed contracts.
Clearing and regulatory fees: Charges associated with clearing trades and applicable regulatory requirements.
Bid-ask spread: The difference between the best available ask and bid prices. Crossing the spread creates an immediate execution cost, which varies with market liquidity and volatility.
Slippage: The difference between the expected and actual execution prices. It can arise from market movements, order size and limited liquidity, particularly during periods of elevated volatility.
Margin Requirements and Costs
Unlike transaction costs, margin is not a fee paid to execute a trade. It is the collateral required to maintain a derivatives position, tying up capital that could otherwise be deployed elsewhere.
When opening a position, a trader must meet the initial margin requirement. As the position is marked to market, gains and losses affect the account balance. If losses reduce the balance below the maintenance margin requirement, additional funds may be needed to keep the position open.
The cost of margin therefore lies primarily in the capital committed to the trade and its associated opportunity cost. Traders may also incur financing costs if they borrow funds to meet margin requirements. These considerations become particularly important in VIX derivatives, where margin requirements can change with market conditions and increase during periods of elevated volatility.
Settlement of VIX Futures
VIX futures are cash-settled. Unlike futures on physical commodities, there is no delivery of an underlying asset at expiration because the VIX itself is an index and not a traded asset. Instead, the final profit or loss is determined using the final settlement value of the contract.
The final settlement value is determined on the morning of the expiration date, usually a Wednesday, through a Special Opening Quotation (SOQ) of the VIX Index. The SOQ is calculated using the VIX methodology applied to the relevant SPX options and determines the final settlement value of the VIX futures contract. As expiration approaches, the futures price converges toward this settlement value, reflecting the contract’s approaching expiration.
For a long VIX futures position, the profit or loss at settlement can be represented as:
For example, suppose an investor purchases one VX futures contract at 20. If the final settlement value is 28, the investor receives:
Thus, the cash-settlement mechanism allows investors to gain or lose based on changes in the market’s pricing of volatility without owning the underlying SPX options used in the VIX calculation.
Figure 1 below illustrates the VIX Futures P&L at Settlement for both long and short positions as a function of the VIX value at maturity, for a VX futures contract bought (long) or sold (short) at a futures price of 20. The contract has a multiplier of $1,000 per index point and is cash-settled at maturity at the Special Opening Quotation (SOQ) of the VIX Index.
Figure 1. VIX Futures P&L at Settlement
Source: computation by the author.
VIX Futures Term Structure
A term structure exists because VIX futures contracts have different expiration dates and therefore reflect market expectations over different future periods. As the time to expiration changes, the information, uncertainty, and expected volatility associated with that future period also change, causing futures contracts with different maturities to trade at different prices.
An upward-sloping term structure indicates that VIX futures with later expiration dates are priced at higher VIX levels than contracts with nearer expirations. This is known as contango. By contrast, a downward-sloping term structure indicates that VIX futures with later expiration dates are priced at lower VIX levels than contracts with nearer expirations. This is known as backwardation.
Figure 2 below illustrates the VIX Futures Term Structure using data obtained from Cboe, covering expiration dates from September 16, 2026, to May 18, 2027. The figure shows an upward-sloping curve, indicating a state of contango. This suggests that VIX futures contracts with later expiration dates are priced at higher levels than those with nearer expirations, indicating that the market assigns higher prices to longer-dated volatility exposure.
Figure 2. VIX Futures Term Structure (September 2026)
Source: computation by the author (Cboe data).
This term structure has implications for investors who maintain long positions in VIX futures. As contracts approach expiration, investors seeking to maintain their exposure must sell the expiring contracts and buy later-dated ones. In a contango market, longer-dated futures contracts trade at higher prices than nearer-dated contracts. Maintaining a long futures exposure therefore involves replacing expiring contracts with higher-priced contracts. Although contango can create a negative roll effect for long futures strategies, the realized return depends on subsequent changes in futures prices and the specific rolling strategy. For long positions, this can create a drag on returns as futures prices evolve toward settlement. However, the outcome depends on how futures prices change over time, rather than on contango alone. The relationship between trading demand, futures pricing and the term structure is discussed further in the market microstructure section below.
VIX Options
VIX options are exchange-traded derivatives that provide nonlinear exposure to the VIX settlement value at expiration. Their pricing is closely related to the corresponding VIX futures contract rather than solely to the current spot level of the VIX Index. VIX options are traded on Cboe Options Exchange and are based on the Cboe Volatility Index (VIX). Unlike individual stocks in stock options, the VIX is itself an index derived from prices of S&P 500 Index (SPX) options.
Cboe offers both monthly and weekly VIX option expirations, providing market participants with different maturities for expressing views on volatility.
Each VIX option contract has a $100 multiplier. Therefore, the dollar value of an option is obtained by multiplying its quoted premium by $100.
For example, if an investor buys one VIX call option with a strike price of 20 and the VIX settlement value is 15 at expiration, the option finishes 5 VIX points out-of-the-money. Consequently, the option expires worthless, with a payoff of zero (before accounting for the premium paid, transaction costs, and other applicable charges).
Settlement of VIX Options
VIX options are cash-settled. This means that there is no physical delivery of an underlying asset when an option is exercised. Instead, the value of an exercised option is determined using the final settlement value of the VIX.
The final settlement value is determined on the morning of the expiration date, usually a Wednesday through a Special Opening Quotation (SOQ) of the VIX Index. The SOQ is calculated using the VIX methodology applied to the relevant SPX options and is used to determine the final settlement value of the VIX option.
For a VIX call option, the settlement value is based on the amount by which the final VIX settlement value exceeds the strike price, and for a VIX put option, the settlement value is based on the amount by which the strike price exceeds the final VIX settlement value.
For a call option, this can be represented as:
For a put option:
For example, suppose an investor holds a VIX call option with a strike price of 20 and the final settlement value is 28. The option’s settlement value is:
If the final settlement value is below 20, the call expires without value.
Figure 3 illustrates the P&L at expiration for long and short VIX call positions as a function of the VIX value at maturity. For a strike price of 20, a premium of 2.00 VIX points, and a $100 multiplier, the long call has a maximum loss of $200 when the VIX settles at or below 20 and unlimited gain above the breakeven level of 22. VIX options are cash-settled at expiration based on the VIX SOQ.
Figure 3. VIX Call Option P&L at Settlement
Source: computation by the author.
Figure 4 illustrates the P&L at expiration for long and short VIX put positions as a function of the VIX value at maturity. For a strike price of 20, a premium of 2.00 VIX points, and a $100 multiplier, the long put has a maximum loss of $200 when the VIX settles at or above 20 and becomes profitable below the breakeven level of 18. VIX options are cash-settled at expiration based on the VIX SOQ.
Figure 4. VIX Put Option P&L at Settlement
Source: computation by the author.
The table below summarizes the key characteristics of VIX futures and options contracts discussed above.
Figure 5. Key Characteristics of VIX Futures and VIX Options
Source: computation by the author.
Market Participants
VIX futures and options involve several types of market participants with different objectives.
Institutional investors and asset managers may use VIX derivatives to hedge portfolios against changes in market volatility.
Hedge funds and proprietary trading firms may use VIX futures and options to speculate on future movements in volatility or implement volatility-related strategies.
Market makers provide liquidity by quoting prices at which they are willing to buy and sell VIX derivatives, facilitating trading in these instruments.
Individual investors can also access VIX futures and options through eligible brokers, subject to account approval, margin requirements and regional availability. They may use these instruments to speculate on changes in expected market volatility or to hedge equity-market exposure. However, access to these products does not imply that they are suitable for all investors, given their leverage, complexity and potential for substantial losses.
Other market participants may combine VIX futures, VIX options, SPX options, and other volatility-related instruments to construct different trading and hedging strategies.
Market Microstructure
Prices in financial markets emerge from the interaction between buyers and sellers. In the conventional microeconomic framework, the demand curve represents the quantities buyers are willing to purchase at different prices, while the supply curve represents the quantities sellers are willing to offer. Their intersection determines the market equilibrium, where quantity demanded equals quantity supplied. In practice, trading mechanisms can take different forms like an electronic order book or block trading arrangements for large transactions. Demand and supply are influenced by market participants’ expectations of future prices (volatility for VIX futures and option markets).
VIX futures and options are traded on electronic markets where buyers and sellers submit orders. Market participants can use different order types, particularly market orders and limit orders. In the VIX futures market, limit orders are recorded in an electronic order book, which displays outstanding buy and sell orders along with their prices and quantities. Incoming orders are matched against existing orders according to the exchange’s matching rules. The highest price buyers are willing to pay is the best bid, while the lowest price sellers are willing to accept is the best ask. The difference between these two prices is the bid-ask spread, which represents an important component of transaction costs. Market depth refers to the quantities available for trading at different price levels. Together, the bid-ask spread and market depth provide useful indicators of market liquidity and the potential price impact of executing an order.
VIX options also trade electronically. Market makers provide quotes and may supply liquidity by taking the opposite side of a trade. Multi-leg strategies, such as vertical spreads, present an additional execution challenge because the trader needs to buy and sell options at a suitable combined price. Cboe’s Complex Order Book (COB) allows these orders to be matched as a combined position, while its Complex Order Auction (COA) gives eligible orders an opportunity for price improvement.
For large VIX futures positions, block trades offer an alternative to execution through the displayed order book. Eligible counterparties can negotiate a transaction privately and report it to the exchange under the applicable rules. This can help participants execute large orders without relying entirely on the liquidity available in the electronic market.
Trading prices also differ from the value used to settle contracts at expiration. VIX futures and options are cash-settled using the Special Opening Quotation (SOQ) of the VIX Index on the final settlement date. Unlike the regular VIX calculation, which uses bid-ask midpoints from SPX options across two expirations, the SOQ uses opening trade prices from a single SPX option expiration selected to provide the required 30-day measure. If a selected option has no opening trade price, its bid-ask midpoint is used instead. The resulting SOQ determines the final settlement value of the expiring derivatives.
Price Formation in VIX Futures
A VIX futures price reflects the price at which market participants are willing to trade exposure to the VIX Index at a specified future expiration. It is not necessarily an unbiased forecast of the VIX level at that date. The VIX measures expected 30-day volatility derived from S&P 500 index options, whereas a VIX futures contract provides exposure to the value of this index at its own expiration. Futures prices therefore reflect expectations about future volatility conditions, risk premia and the balance of buying and selling pressure.
The relationship between futures prices across expiration dates is described by the VIX futures term structure. In contango, longer-dated contracts trade above nearer-dated contracts; in backwardation, nearer-dated contracts trade above longer-dated ones. Contango is frequently observed in relatively calm markets, while backwardation can emerge during periods of market stress, when demand for near-term volatility exposure increases sharply. However, an upward-sloping futures curve does not necessarily imply that the market expects the spot VIX to rise. The curve also reflects risk premia and supply and demand for volatility exposure across different maturities.
Trading activity can influence both the overall level of futures prices and the relative pricing of contracts with different expiration dates. Mixon and Onur (2019) examine how non-dealer trading activity relates to VIX futures pricing. Their findings highlight the role of aggregate net demand in the overall level of futures prices and the relationship between trading activity in individual contracts and the shape of the futures curve. This is relevant to the roll effect, which describes the contribution to returns from replacing a futures contract approaching expiration with a later-dated contract. In contango, maintaining a long position typically involves selling a nearer-dated contract and buying a more expensive deferred contract. This can create a headwind for returns, although the realised outcome depends on subsequent futures-price movements and the investor’s rolling strategy.
Price Formation in VIX Options
The price of a VIX option depends on the possible VIX settlement values at expiration relative to the option’s strike price. A call option has a positive payoff when the final settlement value exceeds the strike, while a put option has a positive payoff when the settlement value falls below the strike. The option premium reflects the potential payoffs, the time remaining until expiration, interest rates and the market’s assessment of the distribution of possible settlement values.
VIX futures play an important role in standard VIX option valuation. Because the VIX Index itself is not directly tradable, VIX futures provide market-based information about volatility priced for specific future dates. The relevant futures price is an important input in option valuation, but it does not determine the option premium on its own. The strike price, time to expiration, interest rates and the distribution of possible settlement values also influence the premium.
Option prices vary across strike prices and expiration dates. Implied volatility, calculated from observed option premiums using an option-pricing model, provides a common measure for comparing these prices. The implied volatility skew describes variation in implied volatility across strike prices, while the term structure describes variation across option maturities. These patterns show how the market prices options with different payoff profiles and maturities.
Tong, Huang and Wang (2022) compare VIX option pricing models that use the VIX Index and VIX futures as state variables, meaning market variables used as model inputs. Their findings indicate that models incorporating VIX futures prices perform better empirically than models relying on the VIX Index alone and several alternative market variables. This highlights the importance of futures-market information in modelling and valuing standard VIX options.
Trading Activity and Market Liquidity
In this section, we examine the trading activity and relative scale of the S&P 500 and VIX derivatives markets by comparing the average daily volumes of their futures and options contracts. The data are sourced from CME Group and Cboe.
Figure 6 below compares the average daily trading volume of E-mini S&P 500 futures and VIX futures in March 2026. E-mini S&P 500 futures (ES) are standardized futures contracts on the S&P 500 Index, with a contract multiplier of $50 per index point. ES recorded an average daily volume of 2.2 million contracts (CME Group), compared with 0.318 million contracts for VIX futures (Cboe).
Figure 6. Average daily number of contracts of S&P 500 and VIX futures (March 2026)
Source: computation by the author (CME Group and Cboe data).
Figure 7 below compares the average daily number of contracts (a proxy for trading activity) of S&P 500 Index (SPX) options and VIX options during Q1 2026. SPX options recorded an average daily volume of 4.855 million contracts (Cboe), while VIX options recorded 0.994 million contracts (Cboe). The figures represent average daily volume across January, February, and March 2026.
Figure 7. Average daily number of contracts of S&P 500 and VIX options (Q1 2026)
Source: computation by the author (Cboe data).
The figures provide an indication of the relative trading activity in S&P 500 and VIX derivatives, but they should be interpreted with caution. Average daily trading volume, measured in contracts, differs from the monetary or notional value of transactions. A higher contract volume does not necessarily imply a proportionally larger market in terms of economic exposure or liquidity. Furthermore, trading volume alone does not fully capture liquidity, which also depends on bid-ask spreads, market depth (number of contracts available in the market at a given price), and execution costs (bid-ask spreads, commissions, and the price impact of a trade). Therefore, the figures are best interpreted as a comparison of trading activity rather than a direct measure of market size or relative liquidity.
Why should I be interested in this post?
VIX futures and options are important instruments for market participants to take positions on future volatility, hedge portfolios against changes in volatility, and manage exposure to market risk. Understanding these instruments therefore provides a practical perspective on the management of volatility risk in financial markets.
Related posts on the SimTrade blog
Futures
▶ Akshit GUPTA Futures Contract
▶ Alexandre VERLET Understanding financial derivatives: futures
Options
▶ Akshit GUPTA Options
▶ Jayati WALIA Black-Scholes-Merton Option Pricing Model
▶ Jayati WALIA Implied Volatility
▶ Saral BINDAL Implied Volatility and Option Prices
VIX
▶ Youssef LOURAOUI VIX index
▶ Saral BINDAL Cboe Volatility Index
▶ Saral BINDAL VIX Data and Statistical Properties
Useful resources
Business resources
CME Group (2026) March 2026 Trading Volume.
Cboe Global Markets (2026) March 2026 Monthly Volume Statistics.
Cboe Global Markets (2026) VIX Futures.
Cboe Global Markets (2026) VIX Options.
Academic references
Black F. (1976) The pricing of commodity contracts, Journal of Financial Economics, 3, 167-179.
Carr P. and L. Wu (2006) A tale of two indices. The Journal of Derivatives, 13(3), 13-29.
Mixon S. and Onur E. (2019) Derivatives Pricing When Supply and Demand Matter: Evidence from the Term Structure of VIX Futures. The Journal of Futures Markets, 39(9), 1035-1055.
Tong C., Huang Z. and Wang T. (2022) Do VIX Futures Contribute to the Valuation of VIX Options? The Journal of Futures Markets, 42(9), 1644-1664.
Whaley R. E. (2009) Understanding the VIX. The Journal of Portfolio Management, 35(3), 98-105.
Zhang J. E. and Y. Zhu (2006) VIX futures. Journal of Futures Markets, 26(6), 521-531.
About the author
The article was written in October 2026 by Saral BINDAL (Indian Institute of Technology Kharagpur, Metallurgical and Materials Engineering, 2024-2028 & Research assistant at ESSEC Business School). His interests include tracking geopolitical developments and analyzing their direct impact on macroeconomic factors such as inflation, trade balances, and currency volatility, with a focus on using data to quantify these global economic ripple effects.
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