Contango is the normal and most frequent condition of the term structure (implied volatility charted over time), in which the forward price of a futures product is higher than the spot (actual) underlying price. The origin of this is that there is often a carry cost with commodities, in which paying a premium for future-dated delivery is a lower cost than storing it during that time. What this means is that the current price is lower than the futures prices and gets higher on further out contracts. 

Intermediate: Another way to think about contango

This contango logic can also be applied to describe what’s going on with an equity’s implied volatility (IV) if it is gradually getting higher on longer-dated contracts. For a term structure edge, traders can write (sell to open) contracts on back months and then buy them on front months.

Regarding what contango communicates to us about market sentiment, it shows that there’s a lack of fear in the market. The opposite of contango is backwardation (contracts on nearer months have higher prices than further out months), which indicates fear, since the market is pricing in wider swings on the front month. This is in contrast to pricing in wider swings as more time allows for more surprise events to happen, as well as generally more time for the underlying security to drift one way or the other.