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The VIX term structure reflects the VIX formula at future points in time. Essentially, the S&P options in the months out on the curve are the data points for the VIX structure. Just like the VIX, the midpoint of the bid/ask spreads are weighted by their distance from the S&P index’s current value. The implied volatilities are calculated to arrive at a VIX measurement for that point in time.

The other term structure reflects the VIX futures pricing. These are the contracts priced on anticipated VIX levels at points in the future. Clearly, these two measures of volatility do not agree, as the actual S&P options have an implied volatility that is lower than the futures pricing.

It is almost as if the futures have an additional layer of time decay, above and beyond the extrinsic value of the S&P options. It is critical to understand this if you are investing in VIX futures based exchange traded products. As the time to the contract moves to the spot price, or today’s VIX level, the two values converge.

The November VIX futures, which expire at the close Tuesday, are in lock-step with the actual VIX. Yet the December futures are 8.5% higher than the spot VIX. January diverges from spot by over 12%.

VIX Volatility Index values generated at:  11/16/2012 15:14:50