Options trading part 7: ATM implied vol term structure | Contango

Contango vs. Backwardation

In the next article, I will try to cover what backwardation is.


You have learned in school, on television, or on YouTube how to visualize atoms, protons, neutrons, electrons, etc.

This model is entirely inaccurate, yet we use it because it helps us visualize the specifics of these abstract subjects.

Consider everything in this article to be an oversimplification to assist you with more advanced reading about options trading

A commodity is a tradable physical asset, including agricultural goods, metals, oil, and energy products. Futures and options contracts may have commodities as their underlying asset.

Hedging with copper futures
How to Manage Base Metals Risk Management and Hedging
bitcoin contango

As explained in an article from BitMEX by Arthur Hayes


What means implied volatility again?

The “Implied volatility” is the market’s expectation of the future volatility of the underlying market.

Options traders often refer to “implied volatility” to gauge what the market currently believes volatility to be.

When demand for options contracts is high, prices increase, and “implied volatility” levels increase.

However, when market participants are less willing to speculate or hedge, prices for options contracts fall, and “implied volatility” decreases.

June 24
August 26

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What is the ATM implied vol term structure?

What is a term premium?

The term premium compensates investors for this extra risk by providing a higher expected return.


Volatility Risk Premium (VRP)

ATM volatility term structure is dynamic, not static

Volatility Risk Premium harvesting

Disclaimer: This subject is technical and I don’t fully understand it either. You can skip reading this part.

There’s a better paper that explains it: https://www.imperial.ac.uk/media/imperial-college/faculty-of-natural-sciences/department-of-mathematics/math-finance/Shibo_Lu_01210524.pdf

But I will still try to explain as much of what I know as I can. I only did 10min of reading/skimming. Possibly I’m wrong on this subject.


Final words



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