How implied volatility differs between near and far expirations. It shows where the market expects the event. Sometimes mislabeled as term shape; the platform's term is Term Structure.
What this structure is
Term Structure (Term Structure) is the curve of Implied Volatility across expirations: how much the market prices next month's move versus three months versus a year. A rising curve (near is cheaper) reflects calm. An inverted one (near is pricier) is a warning: an event is close and it scares the market.
Reading its shape
Rising (Contango): the normal state. The near future is relatively known and the far one carries more unknowns. Inverted (Backwardation): acute fear. Earnings tomorrow, a major data release or a live crisis. Humped around one date: the market knows when the event is and prices it precisely.
Using it in structures
It is the basis of calendar spreads (Calendar Spreads): sell the expensive expiry and buy the cheap one when the gap between them gets extreme. A reader of it knows where to buy time. When the structure inverts, the far expiry can be relatively cheaper than the frightened near one, which is the opposite of what intuition says.
Hypothetical example
A stock reports earnings in two weeks: the two-week expiration is priced at 58% volatility and the next two months at 34%. A clear hump around the event. A buyer of a longer-lasting move skips the hump for the later expiration and pays less for each day of probability.
Common mistake
Buying the nearby expiry because it looks “cheaper” just before a priced-in event: its swollen premium collapses as soon as the event passes (Volatility Crush), even if the stock moves your way. The term structure was already saying so.
Using it in structures
It is the basis of calendar spreads: sell the expensive expiry and buy the cheap one when the gap between them gets extreme. A reader of it knows where to buy time. When the structure inverts, the far expiry can be relatively cheaper than the frightened near one, the opposite of intuition.
Where to see it on the platform
Volatility tools draw the curve across expirations for each symbol and mark the humps around scheduled events.
Volatility tools draw the curve across expirations and mark the humps around scheduled events.
