What is term structure?
VIX term structure compares the spot VIX (current 30-day implied vol) to VIX3M (3-month implied vol). The ratio VIX/VIX3M tells you the shape of the Term Structure. Below 1.0 means contango — short-term vol is lower than long-term expectations. Above 1.0 means backwardation — the market expects more volatility now than later.
Contango — the normal state
In contango (VIX/VIX3M below 1.0), the market is not panicking. Traders expect more uncertainty further out but feel relatively calm today. This is the normal state about 80% of the time and is generally favorable for selling premium. A healthy contango (ratio below 0.85) is especially bullish for premium sellers.
Backwardation — the warning signal
In backwardation (VIX/VIX3M above 1.0), near-term fear exceeds long-term expectations. This signals acute market stress — think flash crashes, geopolitical events, or earnings season volatility. Selling premium during backwardation can be profitable because premiums are high, but it is also very risky because large moves are more likely.
How VolRadar uses Term Structure
Term Structure is a component of the Weather Score. Steep contango adds to the score (favorable conditions). A flat curve is neutral. Backwardation reduces the score and triggers a warning flag. Combined with Premium Edge and Volatility Trend, Term Structure helps paint the full picture of whether today favors selling premium.