VIX Term Structure Explained
The VIX Index measures expected 30-day volatility for the S&P 500, derived from options prices. But the VIX itself is just a snapshot. The VIX futures term structure, the prices of VIX futures contracts across different expiration months, shows how the market prices volatility across time, which a single spot reading cannot.
What is the Term Structure?
The VIX term structure is a curve plotting the prices of VIX futures contracts from the nearest expiration out to several months. Each point is a futures price, not a forecast: it reflects where the market is willing to trade volatility for that date, including a risk premium. The curve is not a prediction of where spot VIX will settle.
Contango: When longer-dated VIX futures trade at higher prices than shorter-dated contracts, the term structure is in contango. It is the curve's usual shape in calm markets. Part of the slope is the risk premium built into longer-dated volatility.
Backwardation: When shorter-dated VIX futures trade at higher prices than longer-dated contracts, the term structure is in backwardation. This occurs during periods of elevated fear and market stress. Near-term volatility is priced above later-dated volatility.
Why the Term Structure Matters
Market Sentiment Gauge: Contango says near-term volatility is priced below later-dated volatility, the usual shape when markets are calm. How steep it is says how much more the market charges for later-dated volatility than for the near month; a steep curve is not, on its own, evidence of complacency or of a coming volatility event.
Backwardation says near-term volatility is priced above later-dated volatility. It is the shape the curve takes when near-term protection is in heavy demand, and it has appeared during acute stress such as the 2008 financial crisis and the March 2020 selloff.
Mean Reversion Signal: A curve that moves from backwardation back to contango says the near-term premium has fallen relative to later months. That describes a change in pricing that has already happened; it is not a signal that a market low is in or that a bounce is coming.
Trading the Term Structure
Roll Yield in VIX Products: VIX exchange-traded products (like VIX ETFs and ETNs) hold VIX futures, not the VIX Index itself. In contango, these products must regularly sell lower-priced front-month futures and buy higher-priced back-month futures, a process called "rolling." This roll creates a persistent negative drag, causing long VIX products to lose value over time even if spot VIX is unchanged.
That roll drag compounds: over multi-year periods it has taken long VIX futures products down by most of their value.
Conversely, inverse VIX products (short VIX ETFs) benefit from contango roll yield, earning a persistent positive carry. However, they are catastrophically exposed to backwardation events when VIX spikes. Several inverse VIX products have been terminated after VIX spikes caused near-total losses.
Calendar Spreads: Trading the VIX term structure directly through VIX futures calendar spreads allows you to express a view on whether the term structure will steepen, flatten, or invert without taking a directional bet on VIX levels.
Reading the Term Structure Daily
Four things to read off the curve each day:
- Check the shape: Is the curve in contango or backwardation? How steep? Our free VIX term structure page plots the nine monthly VIX futures settlements and states which regime the curve is in.
- Compare to recent history: Is the shape changing? A flattening contango curve (even if not yet inverted) means near-term volatility is getting more expensive relative to later months.
- Look at the spot-to-front-month spread: When spot VIX trades above the front-month future, near-term protection is priced above the front-month future's price.
- Note the transition points: Moves from contango to backwardation, and back, are the changes in shape the curve is most often watched for. Each describes a change in pricing, not a forecast.
VIX Term Structure and Options Trading
For options traders, the shape of the curve is a fact about relative prices: in contango, near-dated volatility costs less than later-dated volatility; in backwardation, more. A calendar spread is exposed to changes in that shape, so the curve tells you what such a structure is priced against, not whether it will pay.
The VIX term structure turns a single number into a curve of volatility prices across dates, with the risk premium built into each one. Today's curve, the front-to-back spread and where that slope sits in its own history are on the free VIX futures curve page.