IV Term Structure

IV term structure shows how implied volatility changes across different expiration dates for the same underlying stock. In a normal (contango) state, longer-dated options have higher IV than shorter-dated ones, reflecting greater uncertainty over longer time horizons. When the term structure inverts (backwardation), near-term IV exceeds longer-term IV — this typically signals an imminent catalyst like earnings or heightened near-term fear.

The shape of the term structure provides actionable trading signals. In contango, calendar spreads (selling near-term, buying longer-term) benefit from the differential. In backwardation, the market is pricing a specific near-term event, making it expensive to buy short-dated options and potentially attractive to sell them (if you're comfortable with the event risk). The transition from backwardation back to contango after an event represents the IV crush that collapses near-term premium.

Options Pilot's Value pillar analyzes the IV term structure to determine whether options at different expirations are fairly priced. The Timing pillar uses term structure inversions as an event risk signal — when the curve inverts, it confirms that the market expects a significant near-term move, which factors into strategy recommendations and timing scores.