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Key Takeaways
- Backwardation means the nearer futures contract trades above the later contract being compared.
- In the example, the front-to-second spread is −3.70 VIX points.
- A futures curve compares settlement dates; an option IV curve compares volatility across option expirations.
- One standard VX futures contract changes by $1,000 per VIX point.
- Use the entry and exit or final settlement values to calculate the trading result.
What is backwardation?
Backwardation is a futures curve shape in which a nearer contract trades above a later one, so the deferred-minus-near spread is negative. On the VIX futures curve it means near-term volatility exposure is priced above later exposure, the curve of a stressed market expecting today’s elevated volatility to fade. One segment of a curve can be in backwardation while other segments slope upward.
How is backwardation measured?
Subtract the near price from the deferred price to measure each segment’s spread. A negative result marks an inverted segment.
The example’s 30-day VX future is 32.10 and its 60-day future is 28.40. The spread is −3.70 points. The 120-day contract at 24.60 is another 3.80 points below the 60-day contract. These sampled segments are inverted.
Formula
Term spread = deferred value − near value; the curve is in backwardation when the spread is negative- For VIX futures, use settlement or mid prices of two listed expirations on the same curve.
- For option implied volatility, compare the same delta or forward moneyness across two expirations.
- A single event expiration can invert one segment of a curve that is upward sloping elsewhere.
Worked Example
Spot VIX is 34.50. Three sampled standard VX futures expirations are 30, 60 and 120 days away, priced at 32.10, 28.40 and 24.60 respectively. Each contract has a $1,000 point multiplier.
- 30-to-60-day spread: 28.40 − 32.10 = −3.70 VIX points
- 60-to-120-day spread: 24.60 − 28.40 = −3.80 VIX points
- Front-future basis to current spot: 32.10 − 34.50 = −2.40 points
- Long one front contract at 32.10, final settlement 34.50: (34.50 − 32.10) × $1,000 = +$2,400
- Separate final-settlement scenario of 28.40: (28.40 − 32.10) × $1,000 = −$3,700
Both sampled futures segments slope downward. The two settlement scenarios produce +$2,400 and −$3,700 for the same 32.10 entry. The curve sets the entry price, and the settlement decides the trade.
Backwardation in futures prices vs option implied volatility
VIX futures price contracts tied to a future VIX settlement calculation. An option IV term structure instead compares implied volatility across option expirations at comparable delta or forward moneyness.
Both can show a downward slope, so check the axis before reading the numbers: futures prices read in VIX points, and option implied volatility reads in annualized percent.
Backwardation example: VX futures profit and loss
One standard VX contract changes by $1,000 per point. Buy at 32.10 and settle at 34.50 to earn $2,400 gross. Settle instead at 28.40 and the same long contract loses $3,700.
Final VX settlement uses the Special Opening Quotation. Spot VIX at 34.50 is where the index sits today, and a long future bought at 32.10 profits as that contract’s own price rises.
How traders use backwardation
Read the spread alongside each expiration’s events and the index’s price action. A broad inversion signals stress across the whole curve, while a single event-driven hump prices one date.
Price the option against the curve: compare implied volatility with realized volatility at your expiration, and the options profit calculator shows what that volatility does to the position’s payoff.
Limitations of backwardation
- Judge the trade by its settlement. The same 32.10 long entry gains $2,400 at a 34.50 settlement and loses $3,700 at 28.40.
- Read each segment’s spread. An event can invert a single segment while the rest of the curve slopes upward.
- Size a VX position for the settlement range, since today’s 32.10 is the price of a settlement still to come. The example’s scenarios run from 28.40 to 34.50.
- Check the units before comparing curves. A futures curve reads in VIX points and an option implied volatility term structure in annualized percent, so convert before setting one spread beside the other.
Bottom line
Backwardation means nearer futures trade above later ones, and on the VIX curve it shows near-term volatility priced above later volatility. Measure each segment’s spread in the contract’s own units, then judge any position by its entry price and the settlement it actually receives.
Clear answers
Frequently Asked Questions
Sources and Further Reading
- Cboe: Is VIX Backwardation Necessarily a Sign of a Future Down Market?
- Cboe: VIX Term Structure
- OIC: Understanding Volatility and Options Skew
How entries are sourced, calculated and updated: editorial methodology.