If I understand the CBOE website the value of the futures contract will eventually equal a weighted average of vol for the 30 days preceding the futures expiration. (Hope I am saying that correctly.) So if you traded an option that was 3 months out and the ultimate value of that option was based on the 30 days prior (with its weighted average) then it would almost seem like the clock wont start to run for 2 months. Once you got to the 30 days prior then each day you would slowly converge to the final value of the future. If that is correct then there would be no decay in the option itself during the initial 60 days or so. I understand that the value of the option would move higher or lower based on the futures contract and the markets expectations. What am I missing? If there is theta during this period will traditional option pricing tools work on vix options? Thanks David

The VIX is the volatility of something, the volatility of the VIX is another thing. So the way I understand, there is theta and time decay. And options pricing tools are usable on the VIX but dont believe that Back Scholes is the answer. You must need some stochastic model like the SABR and you must calibrate the params that are going to make sense. This is my interpretation. I can be wrong.

Of course there is theta, it's just like any other option... it just so happens that the underlying is a type of vol. It's similar reasoning as to why options on options have a theta.

The VIX cash price is calculated using a weighted average from the first two normal SPX expirations, so as to estimate the 30 day SPX implied volatility. The VIX futures therefore are based off of vols from a specific place in the SPX vol curves (VIX futures expiration date plus 30 days). Therefore each VIX future, while related to one another, are basically their own underlying. VIX options are simply regular options on their correlated VIX underlying. You can use black/scholes per option to evaluate risks, but the vol surface curves in each expiration will look VERY different than an equity option. Also, you can't directly correlate deltas between expirations as easily as you can in equity options, which can be problematic for hedging. Most professional VIX trading companies try to manage VIX deltas and volatility directly to SPX greeks. In practice this can get very difficult and requires sophisticated modeling wrinkles. Their specific strategies remain proprietary, so I don't know all the exact details (I have never traded the VIX myself). There are a lot of ways to attempt to play the VIX options/futures against SPX options/futures. For instance, a trader might buy VIX futures and sell a strip of SPX options against it. This would hedge the spx vega risks, isolating the gamma and theta of the SPX options.