Term Structure
Implied volatility across expiration dates
Term Structure shows how implied volatility (IV) varies across expiration dates, revealing event risk and volatility expectations.
What is Term Structure?
Term structure plots ATM implied volatility against days to expiration, showing how the market prices volatility over time.
Term Structure Patterns
| Pattern | Shape | Meaning |
|---|---|---|
| Contango | Upward sloping | Normal—longer-dated options have higher IV |
| Backwardation | Downward sloping | Near-term event risk (earnings, Fed, etc.) |
| Flat | Horizontal | Uniform volatility expectations |
| Kinked | Spike at specific date | Event-driven (earnings date, FOMC, etc.) |
Reading the Chart
- X-axis: Expiration dates
- Y-axis: Implied volatility (%)
- Spikes: Events priced into specific expirations
- Slope: Overall volatility term structure
Key Insights
- Backwardation: Near-term uncertainty—event risk is elevated
- Steep contango: Calm near-term, uncertainty further out
- IV spikes: Specific events (earnings, FDA dates, etc.)
- Term structure shifts: Changes in volatility regime
Use Cases
- Event identification: Spikes reveal when market expects volatility
- Calendar spreads: Term structure affects spread pricing
- Volatility trading: Identify rich/cheap expirations
- Risk assessment: Backwardation signals near-term caution
Combining with Skew
- Term structure: How IV changes over time
- Skew: How IV changes across strikes
- Together: Complete picture of volatility surface
Note: Term structure reflects market expectations, not predictions. Events can cause rapid changes.
