Contango
Longer-dated contracts priced above shorter-dated
What is Contango?
Contango A market condition where longer-dated futures or implied volatilities trade at a premium to nearer-dated ones, creating an upward-sloping term structure. In volatility markets, contango is the normal state, reflecting the greater uncertainty of longer time horizons. Calendar spreads benefit from contango as the front-month option decays faster.
Complete Definition
A market condition where longer-dated futures or implied volatilities trade at a premium to nearer-dated ones, creating an upward-sloping term structure. In volatility markets, contango is the normal state, reflecting the greater uncertainty of longer time horizons. Calendar spreads benefit from contango as the front-month option decays faster.
Example
VIX spot is 18, the 1-month future is 20, and the 3-month future is 22. This upward slope is contango.
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