Understanding VIX Futures Premiums, Discounts, and Term Structure

VIX futures represent the market's expectation of volatility 30 days into the future, but they don't always trade at the same price as VIX itself. The relationship between VIX futures prices and the spot VIX index—expressed as premiums or discounts—reveals valuable information about market sentiment, positioning, and the likely direction of both volatility and stock prices. Learning to read these relationships is essential for anyone trading volatility derivatives, whether you're hedging equity exposure or speculating on volatility moves.

The Fundamental Difference Between VIX and VIX Futures

Before diving into premiums and discounts, it's important to understand a critical structural difference. VIX is calculated as a weighted average of implied volatilities from the two nearest-expiring strips of S&P 500 index options. VIX futures, by contrast, reference only a single strip of options—those expiring 30 days after the futures contract itself expires. This mismatch in underlying components creates pricing divergences that are often misunderstood as traders' irrationality when in fact they reflect the mathematical structure of the instruments.

Consider a concrete example: suppose on a given day, near-term S&P 500 options trade at an implied volatility of 28%, while options one month further out trade at 22%. VIX, which blends these two strips, might settle at 25.5, while the front-month VIX futures—based only on the second-month options—would reflect that 22% volatility. This is not a mispricing; it's a structural inevitability.

Defining Premiums and Discounts

When a VIX futures contract trades at a higher price than the spot VIX index, it is trading at a premium. Conversely, when the futures contract trades lower than VIX, it is trading at a discount. The terminology always describes the futures' relationship to VIX, never the reverse.

For example:

If VIX is at 18.50 and the next-month VIX futures are priced at 20.25, the futures trade at a premium of 1.75 points.
If VIX is at 32.00 and the front-month futures are at 27.80, the futures trade at a discount of 4.20 points.

These differences are not random noise—they encode expectations about how volatility will evolve over the coming weeks and months.

The Blended Premium: Smoothing the Transition

Traders face a practical problem: using only the front-month futures contract to measure the premium introduces a discontinuity every time that contract expires. On expiration day, the next contract suddenly becomes "front-month," which can create an artificial jump in the premium calculation.

To solve this, volatility traders compute a blended premium using the two nearest-expiring futures contracts, weighted by how many trading days remain until each expires. This creates a smooth, continuous measure as you roll from one front-month to the next.

Example: Suppose on the first day after August VIX futures expire, the following prices exist:

August VIX futures: 21.50
September VIX futures: 24.25
VIX: 19.75
Trading days until September expiration: 20 days
Trading days between expirations: 21 days

Weighting factors: August gets 20/21 = 95.2%; September gets 1/21 = 4.8%

Blended futures price = (0.952 × 21.50) + (0.048 × 24.25) = 21.65

Blended premium = 21.65 − 19.75 = 1.90

As each day passes, the weights shift by approximately 4.8% per day (in a 21-day interval), ensuring a smooth transition at expiration.

The Term Structure: Seeing the Volatility Curve

When you look at all available VIX futures contracts—stretching from front-month out to six, seven, or even eight months—you're looking at the term structure of volatility. The term structure describes whether futures prices climb (positive slope), descend (negative slope), or remain flat as you move further into the future.

Upward-Sloping Term Structure (Bullish Markets)

During confident, bullish equity markets, the term structure typically slopes upward. Each successive futures contract trades at a higher price than the one before it. This reflects two related facts:

Traders are bidding more for downside protection further into the future, pushing those prices up.
Near-term volatility is naturally lower in a calm market, while longer-dated volatility carries higher premiums because uncertainty compounds over time.

Example:

VIX: 14.20
November VIX futures: 15.50
December VIX futures: 16.40
January VIX futures: 17.15
February VIX futures: 17.80

Each month's futures trade at progressively higher premiums. This pattern usually appears when equity indices are near all-time highs and investors are comfortable.

Downward-Sloping Term Structure (Bearish Markets)

When a bear market is unfolding or appears imminent, the structure inverts. Near-term volatility spikes as traders panic to buy short-term protection. The spot VIX can jump 50%, 100%, or even higher in a day. Meanwhile, longer-dated futures—representing volatility expectations a month or two hence—barely budge. All futures end up trading at significant discounts to VIX.

This divergence can be extreme. In August 2011, for instance, VIX exploded to 48 in a single session as equities collapsed, yet the front-month VIX futures settled at only 36.55—a discount of 11.45 points. The second-month futures were even worse, settling at 30.20. To the uninformed observer, it looked as though futures traders were ignoring the crisis. In reality, the near-term S&P 500 options (which the front-month futures track) had spiked sharply, but options further out had not. VIX, blending both strips, ended up much higher than either single-month representation.

What the Term Structure Reveals About Market Expectations

The shape and steepness of the term structure can serve as a barometer of market psychology.

When the term structure slopes steeply upward: Equity markets are generally bullish, volatility is low, and traders see little near-term risk. Professional investors are happy to sell volatility up front (short-term puts/calls) for premium.

When the term structure slopes steeply downward: A bear market is in progress or panic is acute. Traders are buying short-term insurance aggressively, driving near-term volatility through the roof, while the market is priced to eventually calm down. This can be a contrarian signal: extremely steep negative slopes often mark market bottoms.

When the term structure is flat or mixed: The market is typically transitioning—either from bull to bear, or from panic back to recovery. A flat structure during an equity rally can signal weakness; a flat structure during a decline can suggest stabilization.

Historical Examples: Reading the Signals

February 2007: The Chinese Rate Shock

On February 15, 2007, equity markets were in an easy bull market. VIX was just 10.22, and the term structure sloped gently upward with March futures at 11.55, June at 13.80, and November at 15.10.

Then on February 27, China shocked markets by raising margin requirements. Equities fell sharply worldwide. VIX exploded 79% to 18.31. Yet the March futures only rose 28% to 14.80. Later months rose even less—November touched just 14.55, a gain of only 3%. The term structure had inverted dramatically.

This told an important story: the options market was pricing in a short-term shock that would reverse quickly. And it did—the market recovered within weeks, and volatility collapsed back below 12. Traders who bought far-dated VIX futures expecting an extended volatility spike were badly disappointed. Those who stayed in the front-month contract, accepting the enormous daily roll loss, at least captured more of the spike.

July to August 2007: Subprime Awakens

By mid-July 2007, no one had yet heard of the word "subprime" in casual conversation. Suddenly, in late July, news broke of defaults in mortgage-backed securities. The equity market began a sharp 200-point decline that shook the complacency of the bull market.

Between July 16 and August 16, VIX nearly doubled from 15.59 to 30.83. But this time, the longer-dated futures kept pace far better. August futures rose 83%, November futures rose 32%. The term structure, which had been gently positive, became sharply inverted—all futures now traded at deep discounts to VIX.

This signaled a different market regime. Traders were no longer expecting a quick bounce. There was genuine concern about longer-term deterioration. Indeed, this was the opening act of the financial crisis. If you had held the August contract as a hedge, you'd have captured most of the volatility spike. If you had hedged with November, you'd have been disappointed—though even a 32% gain beats holding equities through a 200-point drop.

October 2008: The Crisis Peak

On October 7, 2008, as Lehman Brothers' bankruptcy unfolded and credit markets froze, VIX soared to 54. Yet the October VIX futures—the nearest-term contract—traded at only 42, a 12-point discount. November futures were at 34, December at 30, and February 2009 at 29. The term structure had become a cliff, plunging sharply lower with each successive month.

This extreme inversion was a signal to market historians and contrary-minded traders: this is panic. When all VIX futures trade deeply underwater relative to spot VIX, and the term structure is nearly vertical, a major bottom is often near. In fact, equities stabilized and rallied sharply later in October. VIX had reached its intraday peak of 88 before the reversal.

Using Premiums and Discounts as Trading Signals

Large Premiums in a Bear Market: Sell Signal

In an ongoing bear market, when volatility is elevated and fear is palpable, a large premium on the front-month futures is a rare and noteworthy event. It suggests that traders are buying far-month protection aggressively—betting that volatility will stay high or rise further. This is often a contrarian signal: the market has become too pessimistic, and a rally ensues.

In late December 2007, as the market briefly stabilized and rallied into year-end, the January VIX futures traded at premiums of 3.5 to 4.6 points above VIX. This was unusual and signaled excessive caution. Within weeks, SPX declined 230 points—but the rally first had exhausted those overly cautious traders. The premium was a warning that the upside was limited.

Large Discounts: Buy Signal

Conversely, when the front-month VIX futures trade at extreme discounts to spot VIX, it often marks a capitulation bottom. Panic buying of near-term puts has driven near-term implied volatility through the roof. Far-term traders aren't convinced the fear will last, so they're not paying up for longer-dated protection. All futures are underwater.

This configuration—large discounts across the board—appeared at the October 2008 bottom, the May 2010 flash crash, and the August 2011 market drop. In each case, it was followed by a meaningful equity market rally.

The Term Structure in NSE Index Options

While VIX futures exist on the CBOE, Indian options traders can apply the same principles to NIFTY and BANKNIFTY index options. Suppose you're monitoring one-month and two-month NIFTY futures on the National Stock Exchange. In a confident bull market, two-month implied volatility premiums will exceed one-month premiums, creating an upward-sloping term structure. In a sharp downside move—such as during an RBI rate shock or geopolitical event—near-term IV can spike 200 basis points while next-month IV rises only 50 basis points, flattening or inverting the curve.

Reading the structure of NIFTY options across expiries (weekly, bi-weekly, month-end) provides the same edge: it tells you whether the market believes the shock is temporary or structural, and whether volatility will persist or fade.

Trading the Term Structure: Calendar Spreads

The term structure isn't just a diagnostic tool—it can be traded directly using calendar spreads (also called time spreads or futures spreads).

Bullish Structure Trade: If you believe the equity market will rally and the steep upward-sloping term structure will steepen further, you can:

Buy the second-month VIX futures
Sell the front-month VIX futures

As the market rises, short-term volatility falls sharply while longer-term volatility falls more slowly, widening the spread. A trader executing this trade on September 17, 2007—when the term structure was inverted and steep—might:

Buy November futures at 22.83
Sell October futures at 24.33
Net debit: 1.50 points

One week later, as Ben Bernanke eased policy and the market rallied 40+ SPX points, the term structure had flattened:

November futures at 19.91
October futures at 19.70
Net spread: +0.21 points

The spread trader nets a 1.71-point gain on a $100 margin (or $625 in today's terms), equaling a $1,710 profit in one week—illustrating the leverage inherent in volatility derivatives.

Bearish Structure Trade: If the term structure is steep and positive and you believe it will flatten during an equity decline, you reverse the trade:

Buy front-month VIX futures
Sell second-month VIX futures

As the equity market falls, near-term volatility spikes while far-term volatility lags, narrowing (or inverting) the spread and generating a profit.

Seasonal and Technical Patterns in the Term Structure

Empirical observation reveals some recurring patterns:

Summer into Fall: Term structures often flatten in July and August before steepening negatively in September and October. This aligns with the historical tendency for equity volatility to spike in autumn.
Post-Crisis Recovery: After a sharp volatility spike, the term structure takes weeks or months to normalize. The near-month discount slowly shrinks as traders' panic subsides and longer-term risks are repriced.
Fed Cycle Dependence: When central banks are easing (cutting rates), the term structure tends to slope upward as uncertainty abates. When tightening, it often flattens or inverts.

Key Practical Rules

Always use a blended premium when measuring the front-month relationship to VIX. Avoid the discontinuity that occurs on expiration day.
In a bull market, large premiums are normal. Don't be alarmed by front-month VIX futures trading 2–3 points above VIX. It's the natural structure.
In a bear market, look for extreme discounts. When all VIX futures trade 10+ points below VIX and the term structure is sharply inverted, a bottom is forming.
If you want to hedge with VIX derivatives, stay in the front-month. Longer-dated contracts will not track VIX movement in a crisis. You must roll frequently.
Use the term structure's steepness as a mean-reversion signal. If it slopes too steeply in one direction, expect it to flatten, and position accordingly.

Key takeaways

What's the difference between VIX and VIX futures? VIX blends two strips of S&P 500 options; VIX futures track only one strip expiring 30 days after the futures contract itself, creating structural price divergences.
How do premiums and discounts form? When implied volatility for longer-dated options exceeds near-term IV, futures trade at premiums; when near-term IV exceeds far-term IV, futures trade at discounts.
Why should I use a blended premium? It eliminates the artificial jump that occurs when the front-month contract expires, smoothing the rolling transition and improving signal clarity.
What does an upward-sloping term structure signal? A bullish market with low fear, where traders expect volatility to remain contained. Normal in bull markets.
What does a downward-sloping term structure signal? A bearish market or acute panic, where near-term risk is high but longer-term expectations are less dire. Often marks market lows.
Can I trade the term structure directly? Yes, through calendar spreads. Buy the second month and sell the front month if bullish; reverse if bearish. This captures the relative movement of the term structure.
How do I use extreme discounts to predict market moves? Large discounts (10+ points) on all VIX futures relative to VIX are contrarian buy signals for equities; they mark panic bottoms followed by rallies.
Why does my far-month VIX futures hedge sometimes disappoint? Because far-month futures don't spike as much as VIX during crises. If you need to hedge volatility risk, you must use front-month contracts and roll them actively.