VIX Backwardation refers to a market condition where the price of nearer-term VIX futures contracts trades at a premium to longer-term VIX futures contracts. This structure indicates an expectation of higher volatility in the immediate future compared to later periods.
Mechanism
While the VIX itself is not directly traded, VIX futures contracts reflect market participants’ expectations of future volatility. Backwardation in VIX futures typically signals short-term market stress, heightened investor anxiety, and a demand for immediate protection against price declines in underlying assets.
Methodology
This phenomenon is observed by options traders and risk managers as a potential indicator of impending market turbulence or a “fear gauge” signal. For crypto, analogous backwardation in implied volatility term structures for major digital assets could indicate similar short-term hedging demand or expected near-term price swings.
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