The VIX estimates volatility on the SPX itself for the next 30 days.

VIX futures are a bet on where the that estimate will be on the day the future expires. In other words, it is a snapshot of what the market expects for volatility 30 days AFTER the future expires. If it is a September future for example, you are guessing how the market prices volatility 30 days forward from September expiration. You are not betting on SPX volatility between now and September, that is a common misconception.

VIX options are cash settled, meaning you get delivery of nothing, just a debit or credit. They are also European exercise, meaning you can’t do anything other than trade them between now and expiraiton.

They price off the futures, NOT the VIX you see on the screen. And since futures carry premiums to the VIX when the VIX has an extended decline, VIX calls here look fat to the naked eye that only compares them to the “cash” VIX. The reverse is true when the VIX runs high; VIX calls can and do trade under parity and puts looked pumped.

Of course moves in the cash VIX have some effect on VIX futures and options, but the further out you go in time, the more limited that effect. Think of this weather analogy. A hypothetical October Weather future let’s you predict the average temperature in Al Roker’s 5 Day forecast on October 15th. Would an unseasonably warm or cold day today effect your prediction of his prediction? Not a whole lot. Same way a move in the “cash” VIX should not have much impact on your prediction where traders will price volatility looking forward in October.

So bottom line; trade VIX options and you are trading a derivative (the option itself) on a derivative (the VIX future) on an estimate of a derivative (the VIX itself is merely a statistically calculated estimate of a theoretical SPX option with 30 days until expiration).

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