Backwardation

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Backwardation is a concept used in respect to the price of a futures contract and the contract's time to expire. When a market is in backwardation, the price of a near-term contract is higher than a contract with a later expiration date.[1] This is due to the convenience yield being higher than the prevailing risk free rate and usually a sign of tight physical supplies.

When the VIX market is in backwardation, the cost of short-term protection against market volatility is higher than the cost for long-term protection. This is considered to be a sign that investors are particularly anxious about where the market may be headed in the next few days. [2]

Backwardation is the opposite of contango.[3]


References

  1. Commodities go backwards to futures. FT.
  2. VIX Briefly Flirts With 'Backwardation'. The Wall Street Journal.
  3. Oil Contango: Roll Yield Rewards. Seeking Alpha.