Volatility Term Structure

Volatility term structure compares implied volatility across maturities for a consistent underlying and moneyness convention. It describes annualized rates for different horizons, not the dollar movement expected over each horizon. A shorter expiry can have higher annualized IV but less total uncertainty.

Read the curve and the calendar

An upward-sloping curve has higher IV at longer maturities. A downward-sloping curve has higher near-term IV. A hump around an event can reflect concentrated uncertainty. These shapes are observations, not trading signals: the relative premiums can compensate for materially different risks.

Use comparable strikes or a consistent delta/forward-moneyness convention, and understand that those conventions produce different samples. Check earnings, central-bank decisions and other dated events between expirations. A 30-day contract and a 60-day contract can include different event sets.

Annualized IV versus total variance

With IV σ and time T in years, σ²T is a simple model measure of total variance. A 30-day expiry at 30% IV has total variance 0.30² × 30/365 = 0.007397. A 60-day expiry at 26% has 0.26² × 60/365 = 0.011112. Despite lower annualized IV, the longer horizon has more total variance.

The corresponding approximate one-standard-deviation percentage scales are 30% × √(30/365) = 8.60% and 26% × √(60/365) = 10.54%. These are model scales, not guaranteed trading ranges.

Extract a forward interval carefully

Under a compatible variance-based approximation, forward variance between T1 and T2 is (σ2²T2 − σ1²T1) ÷ (T2 − T1). For the example above, the forward annualized volatility is √0.0452 = 21.26%. Subtracting the two IV percentages directly would not give the forward volatility.

This calculation is a teaching approximation when applied to individual quoted option IVs. A robust tradable variance measure needs consistent construction across strikes. Stale quotes, mismatched strikes and model choices can produce misleading results, including an apparent negative forward variance.

Calendar spreads have more than one risk

A long calendar commonly buys the later option and sells the nearer one. Its two legs can experience different volatility changes. An earnings event can leave the near leg with high gamma and assignment exposure even if the whole position initially has positive vega. A single parallel-IV shock misses this structure.

Evaluate each leg at the intended exit date with its own remaining time and IV. The later option still has optional life when the first expires, so subtracting two expiration intrinsic values is not a valid general calendar-spread valuation.