When to Use

• When deciding whether today's front-two VX curve is steep enough to justify a short-volatility carry position, or inverted enough to justify buying protection.
• When converting a stated exposure budget into a VX contract count that does not quietly exceed it.
• When you need the front-month basis annualized, with the static-spot assumption attached rather than presented as an expected return.
• When pricing a 1x1 VIX call spread off the front future and you need the honest max profit, max loss and breakeven — not the gross spread width.
• When you need the protective buy-stop on a short VX position expressed as a price and a dollar loss, so it can be entered as a resting order.

When NOT to Use

• As a reason to be short volatility. A steep curve is a description of the present, not a prediction. A short VX future has unbounded loss: on 2018-02-05 the intraday indicative value of the XIV inverse-VIX ETN fell to at or below 20% of the prior close ($108.3681 on 2018-02-02), triggering the acceleration clause that terminated the note (Credit Suisse 6-K, 2018-02-06). Carry accrues in cents and reverses in dollars. Pair this with kill-switch-and-drawdown-circuit-breakers before any short-vol position goes live.
• As a margin or capital model. notional_exposure_usd is contracts x F1 x 1000. FCM initial margin on short VX is set by the clearing member, moves with volatility, and is not modelled here. A notional budget is not a margin budget and is not a loss bound.
• With an at-the-money implied volatility. The VIX option smile slopes upward in strike — a call skew, the mirror image of the equity index put skew — so reusing an ATM quote for a far OTM call misprices it. black76_call has no default IV for that reason. Get per-strike vols from options-implied-volatility-surface-construction.
• As a distributional model of VIX. Black-76 assumes the futures price is lognormal. VIX is mean-reverting and positively skewed; Black-76 is the market's quoting convention for VIX option IVs, and this module uses it as an interpolator for quoted vols, nothing more.
• For VXX, UVXY, SVXY or any volatility ETP. Those track a constant-maturity index and rebalance daily, so their return is a path-dependent compounding of daily index returns, not the front-month basis this module computes. Their leverage factors have also changed: ProShares cut UVXY from 2x to 1.5x and SVXY from -1x to -0.5x effective 2018-02-28. Read the current prospectus; do not assume a factor.
• On the settlement morning. VX and VIX options both settle to the Special Opening Quotation (SOQ) of the VIX Index, computed from the opening prices of the constituent SPX options. There is no continuous market to price against during that auction, and days_to_expiry < 1 raises rather than guessing.
• For weekly VX contracts without checking the calendar. Cboe lists VIX Weeklys futures alongside monthlies, generally listed Thursdays and expiring Wednesdays, up to six consecutive weekly expirations. "Front month" and "front contract" are then different things, and picking the wrong one changes the sign of the slope.

Prerequisites

• Python 3.10+. Standard library only.
• Spot VIX and the front two VX futures: price, final settlement date, and calendar days to expiry for each.
• For the call-spread pricer: either the implied volatility of each of the two strikes, or an observed net debit in index points. There is no default and no fallback.
• Portfolio equity in USD, and a house policy for the exposure budget, the premium budget and the stop distance. The module's defaults (5% notional, 2% premium, 30% adverse move) are illustrative starting points, not published standards.

Workflow

1. Build the two contracts. VIXFuturesContract validates on construction: positive finite price, whole-number days_to_expiry >= 1. A settled or same-morning contract raises rather than being clamped to one day, because a contract with no basis left must be rolled, not carried.
2. Classify the curve. analyze_term_structure(spot_vix, f1, f2) returns the slope in points and percent, the state, the front basis F1 - S, and the annualized basis. It raises if f2 does not expire strictly after f1 — reversed contracts invert the slope sign and silently turn a short-volatility recommendation into a long one, which is the failure mode most worth catching at the boundary rather than in the fill.
3. Read the carry number for what it is. annualized_roll_yield_pct is the front-month basis annualized: the return a short-F1 position earns if spot VIX is unchanged at settlement. It is not a forecast, and it is not the F1 -> F2 curve roll that constant-maturity ETPs harvest. Slope and basis can disagree in sign — a backwardated curve with F1 below spot is both BACKWARDATION and a negative basis — so never infer one from the other.
4. For a contango signal, size and place the stop together. generate_strategy_signal(term_struct, equity) floors the contract count against the notional budget and returns stop_loss_trigger_price and loss_at_stop_usd alongside it. Compare those two numbers before trading: at the module's own reference case the stop loss is roughly 96 days of carry. If the count comes back 0 with NONE_INSUFFICIENT_CAPITAL, the account cannot carry one lot inside its own limit — do not round up.
5. For a backwardation signal, price the spread first. The tail-hedge branch needs a VIXCallSpreadQuote; without one it returns 0 contracts and LONG_VIX_CALL_SPREAD_PENDING_QUOTE rather than inventing a premium. Call price_vix_call_spread(f1, K1, K2, dte, implied_vol_lower=..., implied_vol_upper=...) with the two strikes' own vols, or pass net_debit= from the market.
6. Size the hedge on premium, not notional. Premium is the entire loss bound of a long debit spread, so the premium budget is a true risk budget in a way the futures notional budget is not. tail_hedge_protection_usd is already net of the premium paid.
7. Roll before settlement week. Track days_to_expiry and roll into F2 while there is still a continuous two-sided market. Holding into the SOQ auction exchanges a quoted price for an auction print. See futures-contract-roll-automation.

Common Pitfalls

• Using the $1,000 multiplier on the options leg. VX futures settle at $1,000 per index point; VIX options settle at $100 — the exercise-settlement amount is the difference between the settlement value and the strike, multiplied by $100. Transposing them overstates every option premium, payoff and budget consumption by exactly 10x. This module keeps VIX_FUTURES_MULTIPLIER and VIX_OPTIONS_MULTIPLIER as separate named constants for that reason.
• Reporting the gross spread width as max profit. A long 15-point spread bought for 3.00 points is worth $1,200 at best, not $1,500: the debit is already spent and cannot also be won. Quoting the width makes every spread look like a 4:1 payoff regardless of what it cost, which is precisely the number a sizing decision must not be built on.
• Assuming a debit instead of pricing one. A "typical" debit as a fraction of width is not a market observable. It moves with the level of the curve, the time to settlement and the call skew between the two strikes. Price it or quote it; the pricer raises rather than guessing.
• Rounding a small account up to one lot. A 5% notional budget on a $50,000 account is $2,500; one VX contract at F1=16 is $16,000 of notional — a 6.4x breach, on the one strategy whose loss is unbounded. max(1, ...) in a sizing function is a capital-protection defect, not a convenience.
• Pricing VIX options off spot VIX. VIX options and the VX future settle to the same SOQ, so the future is the tradeable forward. In a spike, spot VIX moves proportionally more than F1, because F1 prices the expected VIX at settlement rather than today's level. Buying calls on a spot spike without checking F1 buys a move the forward has already declined to follow.
• Setting a spot-referenced stop on a futures position. For the same reason, a "+30% on spot VIX" stop and a "+30% on F1" stop are different triggers, and only the second can be entered as a resting buy-stop against the position you hold. This module computes the stop on F1 and says so.
• Reading a NaN as a passed check. Every comparison against NaN is False, so if spot_vix <= 0 lets NaN through and the failure surfaces later as a NaN contract count. Inputs are checked for finiteness at the boundary here.
• Trusting an exactly-on-threshold classification. F1=20.00 with F2=20.40 is a 2.00% slope on paper and 1.999999999999993 in binary floating point, which classifies FLAT against a 2.0% threshold and suppresses the trade. The slope is rounded before comparison so the boundary behaves as documented.

Verification

Run the test suite from the skill's scripts/ directory:

python -m unittest discover -s skills/vix-and-volatility-index-derivative-strategies/scripts -v

42 tests. Option prices are checked independently of the implementation — by put-call parity against a Black-76 put written in the test file, by no-arbitrage bounds, by monotonicity in strike and volatility, and by the zero-vol limit — and spread economics are checked against a terminal payoff function written in the tests rather than by restating the module's algebra. Eight suites are explicit regressions and fail against the pre-2.0.0 behaviour: the options multiplier, the gross-width max profit, the fabricated 25%-of-width debit, the max(1, ...) sizing floor, notional-based option sizing, NaN spot VIX, clamped expiry, and reversed contract order.

Sign-off gates are in assets/checklist.md; contract specifications, formulas and their sources are in references/standards.md; the operational sequences are in references/workflows.md.

Related Skills

• options-implied-volatility-surface-construction — produces the per-strike IVs the spread pricer requires.
• variance-swap-and-volatility-derivative-pricing — the variance-space counterpart to these futures-space trades.
• tail-risk-hedging-with-options — the same budget-versus-protection problem in SPX puts rather than VIX calls.
• kill-switch-and-drawdown-circuit-breakers — the out-of-band control a short-vol position must sit behind.
• futures-contract-roll-automation — the roll mechanics this skill only signals the timing for.
• synthetic-continuous-futures-contract-construction — for backtesting a rolled VX series without splicing artefacts.
• options-greeks-real-time-portfolio-aggregation — consumes the spread's exposure at portfolio level.
• physical-vs-cash-settlement-handling — VX and VIX options are cash-settled to the SOQ; this covers the general case.
• cboe-options-exchange-api-integration — market data and order entry for the venue these contracts trade on.