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Real-time analysis of the VIX Futures Curve (VX), the CBOE spot VIX indices (VXST, VIX, VXV, VXMT) and the S&P 500 index (SPX). Follow the VIX term structure graphically in real time. In this lesson, I want to teach you about Contango and Backwardation, and how that's relevant to trading futures and options on futures. Several analysts over the years have suggested a .90 ratio of the VIX to VXV for detecting contango (under .90) and backwardation (over .90). Some traders assume that UVXY tracks the CBOE Volatility Index but in fact that is not true. Understand two different movements of the forward curve, contango and backwardation, and why these movements are important. Hear from active traders about their experience adding CME Group futures and options on futures to their portfolio. Lesson highlights: • What is VIX Contango and Backwardation? Contango may seem daunting to those new to investing or unfamiliar with futures contracts, but it doesn’t have to be. That's the price difference between today's VIX and next month's VIX. Contango Explained Contango exists when the price of a particular commodity, index, or exposure to any investment vehicle via derivatives is priced higher in the future than in the present. See the extent of the contango or backwardation. A detailed explanation of contango is available here: “VIX contango explained.” The VIX contango is currently around 10%. When the VCO goes above 25, we have a rally under way. Well, as explained so far, VIX futures should trade at a discount to the S&P 500 options term structure and that discount depends on implied vol of vol and time to maturity, with a higher implied vol of vol should account for a larger discount. Profile Profile Settings Account and Billing Referred friends Coins My Support Tickets Help Center Ideas Published Followers Following Dark color theme Sign Out Sign in Upgrade Upgrade now 30-day Free Trial Start free trial Upgrade plan Pay nothing extra Upgrade early You will also gain a thorough understanding of the key concepts of Contango and Backwardation. Sign In Ticker Trading Ideas Educational Ideas Scripts People. This is very common in VIX futures – in the long run, contango occurs vast majority of time, which is due to the skewed and mean reverting nature of the VIX and volatility in general (long time at low levels, with occasional big but mostly short-lived spikes). Oil, for example, might be priced at $100 in the current future contract. The VIX Term Structure (VIX Futures Curve) Explained. If you trade VIX futures (and if you ever bought/sold UVXY you do) then contango and backwardation periods are important to monitor. The VIX Explained. Put simply as possible, the VIX projects the implied volatility of the S&P 500 for the next 30 days using S&P 500 options. VIX futures tend to rise when the S&P 500 falls -- the correlation of returns is about -0.7. VIX Calculation Explained. Only S&P500 option quotes directly from CBOE are used. Like other asset classes, VIX futures in normality is in contango, with a positive gradient as the volatility increases with maturity. Under "normal" market conditions, the VIX Index is typically below the near-term VIX futures contracts (a state of "contango"). You’ll often hear financial media pundits refer to it as the “fear gauge” or “fear index” of the stock market, which is mostly true. So specific to the VIX futures, below 2.98% contango is actually in the bottom 30% of values, and above 8.99% is in the top 70%. The VIX is a well debated, but much misunderstood index. If there were no contango in VIX futures, everyone would buy them to get free insurance against stock market declines. The opposite condition in the futures market to contango is called backwardation. Contango vs. Normal Backwardation: An Overview . Retrieve and display historical VIX term structures all … ... Contango (Upward Sloping): Longer-term VIX futures contracts are more expensive than shorter-term contracts. • Platform Examples in /CL and VIX However, backwardation can occur when markets are in crises, as short-term volatility exceeds long-term volatility. However, the futures used to create ETPs like the iPath S&P 500 VIX Short-Term Futures ETN (VXX) are based on the future VIX price, which is almost always more expensive than the spot price. UVXY Explained. As time passes, VIX futures contracts slowly converge towards the VIX Index. Contango is a situation in the price action of the commodities market where the futures forward price of a commodity is more than the spot price expected of the futures contract at its maturity and delivery date. 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