Term Structure of Volatility
VIX, VX futures, contango regimes, and what the curve says about the cycle
On a calm Tuesday morning in mid-2017, the VIX index — the market's measure of 30-day forward implied volatility on SPX — closed at 9.93, an unusually low value that traded below 10 for only 32 sessions in the index's recorded history. The same morning, the September 2017 VIX futures contract closed at 12.
45, the December 2017 contract at 13.85, and the September 2018 contract at 15.95.
The pattern — successively higher prices for successively longer-dated contracts — is called contango and is the normal shape of the VIX futures curve in calm regimes. The structural reason: investors pay a premium for the option to be exposed to vol at distant dates because they expect uncertainty to be higher in the future than the (currently calm) present. The same morning's curve, viewed seven months later on Monday February 5, 2018 after the Volmageddon shock, looked nothing like Tuesday's calm-regime curve.
That is the opening. Finishing a lesson is where it stops being interesting and starts being useful: the full lesson runs to 9 sections and ends with 6 practice questions. A free account is what opens the rest, and the other 255 lessons in the Academy with it. No card.
What this lesson covers
- 1VIX futures — the forward curve made tradeable
- 2Backwardation — what an inverted VIX curve means
- 3VIX Futures Curve Visualizer
- 4The VIX formula and the variance swap connection
- 5VIX futures term structure — typical shape across regimes
- 6Roll yield in contango — the structural decay of long-VIX ETPs
- 7August 5, 2024 — yen carry unwind and the largest single-day VIX spike since March 2020
- 8Where to see this on the platform
- 9Summary