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Term Structure of Volatility

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Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

The Term Structure of VIX measures traders’ perceptions of 30 day volatility X days in the future.

For indices, the term structure is usually upward sloping, we call this contango. However, sometimes short term perceptions of volatility are greater than long term perceptions and the curve moves into backwardation.

Sometimes during a market selloff, the VIX term structure may go backward with front month volatility higher than the back months.

VIX term structure trades in contango 82% of the time. Since volatility is mean reverting, when the VIX term structure is in backwardation, we can potentially sell volatility to take advantage of the volatility contraction.

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