← AdvancedLesson 4 · 3:50
Why do different expiries price differently? Contango and backwardation
Summary
You can read the volatility curve across expiries and explain what the VIX and a VIX future are. You can tell contango from backwardation, and show how each expiry carrying its own volatility changes an option's price.
Key terms
- at the money
- An option whose strike price equals the stock price, so all of its price is time value.
- volatility curve across expiries
- A line of implied volatility for each expiry date, read from the nearest date to the furthest.
- VIX
- A number Cboe works out from SPX option prices, showing the volatility they imply for the next 30 days.
- VIX future
- A price agreed today for what the VIX will be on a later date.
- contango
- A volatility curve where later months cost more than near months, the usual shape in calm times.
- backwardation
- A volatility curve where near months cost more than later months, the shape of stress.
Check yourself
Answer each question to see why the right answer is right.
1. What is the VIX?
2. What does contango mean for the VIX futures curve?
3. On a calm day the VIX is at 13 and the later futures sit near 18. Why does the curve slope up?
4. On 2 Nov 2026 the SPX option ending two days later carried nearly 25%, while the early December one carried under 17%. Why was the near one so high?
5. At 30% for every expiry, the XYZ $100 call costs $345, $600 and $850 for 30, 90 and 180 days. With an example contango of 30%, 32% and 34%, what happens?
Finished the video and the quiz? .