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VIX term structure

The curve of VIX futures prices across expiries, normally upward sloping in calm markets and sharply inverted during stress.

In quiet periods the curve is in contango: spot VIX low, each successive month higher, reflecting the market's knowledge that volatility mean-reverts upward from low levels. Long volatility positions then bleed through negative roll-yield every month.

In a shock the curve inverts. Spot VIX spikes above the front month and the whole curve slopes downward, because the market expects today's panic to fade. Inversion is one of the more reliable signals that a stress episode is genuinely underway rather than a routine pullback.

The persistence of contango is the reason long volatility ETPs lose value relentlessly over time, and why the short volatility trade worked for years until February 2018 destroyed it in a single afternoon.

Example: calm market — spot 13.0, M1 14.5, M2 15.8, M3 16.6. Stressed market — spot 34.0, M1 29.0, M2 25.5, M3 23.0. The second shape is a warning; the first is a carry opportunity with a fat tail.

Related: vix-futures, contango, backwardation, roll-yield, forward-curve

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Contango and backwardationTwo futures curves against contract expiry: one rising above spot, one falling below it.The same commodity, priced for delivery at different dates.78.0076.0074.0072.0070.00Futures pricespot+1m+2m+3m+4m+5m+6mMonths until the contract expiresspot price74.00CONTANGOlater contracts cost more than spotBACKWARDATIONlater contracts cost less than spot
Contango and backwardation. A futures curve shows what buyers will pay for delivery in one month, two months and so on. When later contracts cost more than the spot price the curve is in contango; when they cost less it is in backwardation.

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