The VIX measures expected 30-day volatility. But volatility expectations exist across many horizons, and the VIX term structure plots them - near-term versus further-out. The shape of that curve is a read on market stress that a single VIX print can't give you.
Contango: the normal state
Contango is when near-term volatility expectations are lower than longer-term ones - an upward-sloping curve. This is the market's normal, calm state: no immediate fear, with more uncertainty priced further out. Most of the time, in a rising or steady market, the VIX curve is in contango.
Backwardation: the stress signal
Backwardation is when near-term volatility is higher than longer-term - a downward-sloping curve. It means the market expects turbulence right now that it believes will settle later. Backwardation is a fear signal; it tends to appear during selloffs and spikes, and it often coincides with capitulation.
Contango is the market relaxed. Backwardation is the market bracing for impact.
Why it matters
The curve's shape adds context that the VIX level alone misses. A moderate VIX in backwardation signals more acute near-term stress than a similar VIX in contango. Combined with the reminder that low VIX isn't safety, the term structure is a sharper gauge of the volatility regime - and regime is what decides how the tape behaves.
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