Latest / The Day Trading Podcast with Fexingo: Active Trading, Charts, and Short-Term Market Strategy / How Day Traders Read the Volatility Term Structure for Entries
Transcript
- Lucas: Alright, it is July 7th, 2026, and the VIX is sitting at 15.93—down about 4 percent over the last five days. But here's the thing I keep noticing: a lot of day traders I talk to are still just watching the spot VIX number, and they're missing the real signal, which lives in the futures curve. Luna: You mean the term structure—the relationship between the front-month VIX futures and the later months? Lucas: Exactly. The spot VIX is a calculation of implied volatility from S&P 500 options. But the VIX futures—those are actual tradeable instruments, and they reflect where institutional money is positioning. So when I see the front-month futures trading at a premium to spot, that's contango. And when they trade at a discount, that's backwardation. Both tell you something about the next few days. Luna: Right now, with the VIX at 15.93, where is the curve? Are we in contango or backwardation? Lucas: As of this morning, the front-month July futures are around 16.20, and the August futures are around 17.10. So we've got about 90 cents of contango from spot to August. That's a fairly steep curve—it suggests the market is pricing in elevated volatility a month out, probably because of earnings season and macro uncertainty. Luna: So if I'm a day trader, what do I actually do with that information? I can't trade the VIX futures directly in my brokerage account usually. Lucas: You can trade VIX ETFs and ETNs like VXX or UVXY, but you've got to be careful—they don't track spot VIX perfectly because of roll yield. But more importantly, the shape of the curve tells you whether the market is complacent or scared. When contango is steep, that usually means fear is priced in for later, so near-term you might see mean reversion in the S&P. A flattening curve or a shift into backwardation often precedes a sell-off. Luna: You know, it's funny you mention that—because just last week we saw a brief backwardation spike on that hawkish Fed minutes surprise. VIX futures went negative for about an hour. Lucas: And that's exactly the kind of event a day trader can exploit. When the curve inverts suddenly, it means hedgers are paying up for immediate protection—that's a signal that institutions expect a sharp move. I've got a rule of thumb: if the front-month futures trade at a discount to spot for more than a couple of hours, it's time to at least hedge your longs. Luna: Let's talk about the VVIX too—the VIX of the VIX. It's at 87.09, down about 1.8 percent. How does that fit into the picture? Lucas: VVIX tells you about the expected volatility of VIX itself. When VVIX is high—say above 100—it means traders are pricing in big swings in the VIX, which often happens around crisis moments. At 87, it's moderate. But if VVIX starts rising while spot VIX stays flat, that's a divergence that often precedes a volatility explosion. I watch for that combination to get early warning. Luna: So let's say I'm scanning pre-market, I see the VIX curve in contango but VVIX starting to tick up. That's a potential buy signal for VIX calls or a hedge on my portfolio? Lucas: Exactly. The term structure gives you the base case, and VVIX gives you the tail risk. If both are elevated, you know the market is already pricing in stress. But if VIX is low and the curve is steep, and VVIX starts creeping up, that's the setup that catches a lot of traders off guard. Luna: And if our money conversations have helped you think about a decision differently this year—whether it was a trade you took or a trade you passed on—we want to mention that we deliberately keep this show ad-free. We don't run ads, we don't have sponsors. It's just the two of us talking shop. Lucas: Yeah, and that choice is only possible because of listeners who chip in. If the show adds value to your routine, the simplest way to support that is buy me a coffee dot com slash fexingo. No pressure, no perks, just knowing you're keeping it ad-free for everyone. Luna: Exactly. And now back to volatility—because I want to dig into a specific historical example. Lucas, you mentioned the 2018 VIX spike? Can you walk us through what the term structure looked like in the days before? Lucas: Sure. In early February 2018, the VIX was around 11, and the futures curve was in steep contango. Then on February 2nd, the VIX jumped to 17, and within a week it hit 50. But what a lot of people missed is that on February 1st, the VVIX had already spiked from about 90 to 110. That was the warning. The term structure flipped from contango to backwardation on February 5th, the day of the big sell-off. Luna: So if you were watching VVIX and the curve shape, you could have seen it coming. Whereas just looking at the spot VIX at 11, you'd have thought everything was calm. Lucas: Precisely. And that's the edge. The spot VIX is backward-looking in a sense—it's a snapshot of current options pricing. But the futures curve and VVIX are forward-looking. They tell you what the smart money is hedging for. So day traders who only watch spot are always a step behind. Luna: What about now? With contango still pretty steep and VVIX at 87, what's your take on the next week or two? Lucas: I think we're in a range-bound environment for now. The S&P 500 is at 7,537, up about 1.3 percent over five days. The VIX is low but not super low. Contango suggests no immediate panic, but the fact that the curve is still relatively steep tells me the market is pricing in some event risk—probably earnings and the Fed meeting later this month. So I'd expect choppy sideways action with occasional intraday volatility. Luna: So a day trader might want to play mean reversion strategies—buying dips in the S&P when VIX spikes intraday, rather than chasing breakouts. Lucas: Exactly. And you can use the VIX futures themselves as a timing tool. If you see the front-month future suddenly drop relative to spot—meaning contango is compressing—that's often a signal that the market is about to rally. Because it means demand for protection is fading. Luna: I've noticed that sometimes the VIX futures curve shows a 'hump' shape, where the second month is the highest. What does that mean? Lucas: A hump—where the front month and third month are lower than the second—often indicates a specific event risk, like an election or a major data release. The market is pricing in a volatility spike for that particular period. As a day trader, you can use that to anticipate which weeks might be more volatile. For example, if you see a hump around the Fed meeting date, you know to be cautious that week. Luna: That's really practical. So to sum up: watch the term structure, not just the spot level. Watch VVIX for early warnings. And think about what the curve is telling you about future event risk. Lucas: Exactly. And I'd add one more thing: pay attention to the shape at the open. The first 30 minutes often have distorted pricing from overnight hedging. Wait until about 10:00 AM Eastern to see the true curve shape after the initial rush. Luna: Good tip. I know I've been guilty of jumping on a VIX spike at 9:35 only to see it fade by 10. Lucas: We all have. The term structure is a more reliable signal because it's based on actual institutional flows, not just retail panic. So next time you see a VIX spike, don't just look at the number—look at the curve. That's where the edge is. Luna: All right, that's a solid framework. Let's check in on this again next week and see how the curve evolves into earnings. Lucas: Deal. I'll be watching the VIX futures roll data and VVIX trends. Until then, trade smart. Luna: Thanks for listening, everyone. We'll catch you next time on The Day Trading Podcast.