Contango

Contango describes the normal state of the IV term structure where longer-dated options have higher implied volatility than shorter-dated ones. This makes intuitive sense: there's more uncertainty over 90 days than over 30 days, so the market demands a higher volatility premium for longer horizons. When plotted on a chart with expiration on the x-axis and IV on the y-axis, contango produces an upward-sloping curve.

The opposite of contango is backwardation, where near-term IV exceeds longer-term IV. Backwardation typically occurs ahead of major catalysts (especially earnings) when traders bid up near-term options to speculate on or hedge against the event. After the event passes, the term structure usually snaps back to contango as near-term IV collapses (IV crush) and the curve normalizes.

Options Pilot's Value pillar analyzes whether the term structure is in contango or backwardation as part of its IV assessment. Contango is the baseline — it's normal and doesn't signal anything unusual. Backwardation, however, flags an event-driven IV anomaly that affects strategy selection. Calendar spreads, for example, work best in contango (they benefit from the term structure differential) and can lose money in backwardation.