Been trying to wrap my head around VIX term structure lately but it’s more complex than I thought.
I read about contango and backwardation but still struggle to see how it affects trading decisions. The curves look different each time I check.
Does anyone else find this confusing when starting out?
Understanding VIX term structure can be tough. One simple approach is to focus on one pattern rather than everything all at once. Contango usually means longer-term futures are priced higher than shorter ones, and this is common. Backwardation occurs during market stress when the opposite is true. Observing how the curves behave in different market scenarios can clarify things more than memorizing the concepts.
VIX structure burned me hard when I first started trading volatility products two years back.
I bought VXX thinking volatility would stay high but got crushed by contango decay. Lost about 40% in three weeks even though the market stayed choppy.
Now I just watch when the front month trades above the second month. That backwardation signal saved me from entering bad positions during false breakouts last month.
Took me months to get VIX curves, just track front month vs back month spreads.
Track VIX/VIX9D ratio instead. Above 1.2 signals backwardation. Below 0.9 shows steep contango. Simpler than analyzing full curves.
Many traders make VIX structure overly complex when it is simple. In normal conditions, long-term futures price higher than short-term, which is contango. During market stress, the short-term can spike above the long-term, indicating backwardation.
The important aspect is the steepness of these curves. A steep contango means quick decay for volatility products. A steep backwardation shows significant market fear.
I primarily use it for entry timing instead of making it my main strategy. Observing slope changes weekly will help you recognize useful patterns.