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The relationship between implied volatility at different expirations. Contango (near-term IV lower than far-term) is normal. Backwardation (near-term higher) signals stress.
⚡ KEY TAKEAWAY: Contango = normal, good for sellers. Backwardation = market stress, reduce position size or wait.
Contango
Normal state = green light for sellers. VIX/VIX3M below 0.9 means term structure strongly supports premium selling.
Backwardation
Market is pricing more fear now than later. Reduce size, tighten stops, or sit out until contango returns.
VIX (Volatility Index)
VIX 15–25 is the sweet spot for premium sellers — enough fear for rich premiums, not enough for gap risk.
VIX3M
Watch VIX/VIX3M ratio, not VIX alone. Ratio below 1.0 confirms the market isn't panicking short-term — safer to sell.