What it means
Vol term structure is the implied volatility curve across expirations for a single underlying. Normal shape: contango — longer-dated options have higher IV than shorter-dated, reflecting uncertainty rising with time horizon. Inverted shape: backwardation — short-dated IV exceeds longer-dated, signaling the market prices an IMMINENT vol event (typically within the next 30-60 days). Backwardation is characteristic of market stress: March 2020, October 2022, August 2024.
Why it matters
Term structure shape signals timing of expected vol events. Contango = vol expected to rise gradually over time = normal. Backwardation = imminent shock priced in = active fear. The transition from contango to backwardation is itself a tradable signal — typically marks the early phase of a vol-expansion event.
How to use it
Track VIX vs VIX9D (9-day VIX). VIX9D > VIX = backwardation, near-term shock priced. VIX > VIX9D = contango. Persistent backwardation lasting 5+ sessions = sustained stress regime; long-vol exposure favorable. Sharp reversion to contango = vol-expansion event has played out.
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