Unit 1 · Level 3 · The volatility surface
Near and far: term structure
Line up the SAME strike across different expiries and IV changes with time: that's the term structure. In calm markets it slopes gently upward, because more time leaves room for more uncertainty. But scan the curve before earnings and you'll see a bump: the one expiry containing the event trades visibly richer than its neighbors. The calendar of fear, drawn in prices.
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What you get asked
The 'term structure' of volatility is…
Skew reads IV across strikes; term structure reads it across time. Two different axes of the same object.
Earnings land in 10 days. Which expiry carries the highest IV?
The event's uncertainty is concentrated in the first expiry that must live through it. That's the bump pros scan for.
An earnings date approaches and passes. Put the term-structure story in order
The bump inflates into the event and deflates the moment it's over. That deflation is the vol crush you met in the Trading course's League 5.
Calm markets slope IV gently upward with time; in a panic, near-term IV spikes ABOVE far IV and the curve flips into ___.
An inverted (backwardated) vol curve says the market fears NOW more than later. It shows up in nearly every crisis, including March 2020.
You spot an inverted vol term structure on an index. The message is…
Inversion is the volatility market's fever reading: acute, present-tense fear that usually mean-reverts as the crisis passes. It says nothing about direction. 🐜
The rest of this unit
Skew, term structure and IV rank: the 3D map every options pro trades from.