How to Read VIX and VIX Term Structure

VIX is the ‘implied’ 30-day volatility of the S&P 500 derived from call and put options. It represents the probable range of movement in the S&P 500 above and below its current level in the immediate future. Take the VIX close on Wednesday 3/25/2020 as an example, the number 63.68 can be interpreted as that over the next 30 days, there is a 68% chance that the S&P 500 will be trading within the range of +-18.4% (equivalent to +-63.68% annualized) from where it is now. Translated to levels, that’s between 2020 and 2930 based on Wednesday’s close of 2475.

VIX term structure is the relationship between VIX futures prices and maturity dates. It is said to be in Contango when VIX futures are priced higher than the VIX spot and in Backwardation when the relationship is reversed. For both Contango and Backwardation, the term structure curve can also take the shape of either concave up or concave down, depends on whether the mid-term futures prices are closer to the short-term prices or to the long-term prices.

In January and early February, the stock market was unaware of the imminent crash. VIX started the year at 13.78 and its term structure was in the classic Contango and concave down shape. When the coronavirus outbreak hit China, the VIX spot was slightly elevated to 17.97 on February 3 out of concerns of supply chain disruptions and a global economic slowdown, but the VIX term structure was nearly flat (green line in the chart below), indicating that the market wasn’t really worried. The curve went back to its classic shape on February 19, 2020. (Note that there’s a bump in the back end for all three curves, because VIX futures prices are higher around the time of the presidential election)

Then the sell-off began on February 20. From February 21 to 28, the VIX term structure quickly evolved from Contango to Backwardation as VIX spiked and went ahead of the futures prices. But the increases were relatively small and mostly in the front end (the cluster in the chart below), showing that investors believed that the episode would turn out to be no more than a temporary hiccup.

Entering March, major indices had their fastest downfalls in history. VIX shot up to 81 on March 16. Its term structure exhibited severe Backwardation and all futures prices moved up across the time horizon (blue line in the chart above). The message it was delivering: the stock market could be all over the place in the near term, and even 6 months out (180 days), the range of movement for the S&P 500 would be as wide as +-32% annualized.

What’s interesting is that from March 16 to 23, in Backwardation, the VIX futures curve changed from concave up to concave down (black line to green line in the chart below), as the front end dropped with the spot, but the mid and back ends stayed the same. As a comparison, the 30-day to 90-day futures were priced much lower relative to the VIX spot during the financial crisis on October 16, 2008 (blue line).  This concave downward shape we are having now indicates that it would be some time before VIX dials down to below 40 and uncertainty could hover over the stock market longer than what was predicted on that particular day in 2008.

Like the stock market itself, of course, VIX and its term structure change everyday, if not every moment. When new information arrives, investors collectively update their views and expectations on where the market is heading to.

(All charts are from

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