Beta of VIX Futures to VIX Spot

VIX Futures are the most direct way to trade the VIX. However, the price of the front month future will hardly track the VIX one-to-one. Thus it is important to estimate the sensitivity (beta) of the futures versus the index so that we can have some gauge of how our futures position might change in relation to the index.

The chart below shows that the front month futures (VF1) can be quite different from the VIX spot index.

Note that as VIX spot index gets higher, it is more likely that the VF is in backwardation. This is intuitive as at higher levels, it's much more likely that the VIX recedes back to some normalized lower level by settlement date.

Contango vs Days to Expiry

First thing to note is that VF is most of the time in contango, and up to 30% premium. The contango ratio here is simply VF/VIX such that a reading of 1.3 means the VF is 1.3 times the value of VIX.

Second thing to note is the decay of contango - looking at how the cluster of 5-10 DTE decays the fastest as it goes to the 1-2 cluster, compared to the decays of the other clusters. This means that the decay rate is fastest when the DTE is less than 10 days - something to note if you're selling volatility.

Estimating beta

Beta can be measured in many ways. Here we use daily changes in the front month future (VF1) over the VIX index, expressed as a ratio.

We should expect that as the days to expiry decreases, the VF will track the VIX more closely. This is because VF is essentially a bet on what the VIX will settle at the VF expiry date. As expiry gets closer, market participants have narrower ranges for their predictions.

We are able to see from the chart below that the median beta gets closer to 1 as the days to expiry goes down. The betas are however very noisy and it might be useful to use other ways to measure beta, perhaps using intraday data.