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Volatility Term Structure

The shape of implied volatility across option maturities — flat in calm regimes, inverted (front-loaded) in stress.

Definition

In normal regimes, IV term structure slopes upward — longer-dated options have higher IV because they cover more potential events. In stress, the curve inverts: front-month IV exceeds back-month as immediate vol exceeds expected long-run vol.

VIX vs VIX3M is the most-watched proxy. VIX/VIX3M > 1 signals immediate stress; < 0.9 signals calm.

Why it matters

Term structure tells you when stress is acute vs structural. It's a key input for vol-targeting strategies and risk-parity rebalancing.

Worked example

August 2024 carry unwind: VIX/VIX3M briefly hit 1.7 — extreme inversion. Reversion to <1.0 within two weeks coincided with the equity recovery.

Frequently asked

Why does the curve normally slope up?⌄
Longer-dated options span more potential events (earnings, Fed meetings, geopolitics), so the embedded expected vol is higher.
What does inversion signal?⌄
Acute near-term stress that the market expects to subside — a tactical opportunity for vol sellers if confirmed by other signals.
How do you trade the curve?⌄
Calendar spreads in VIX futures, or long-back / short-front IV positions in equity options.
Is VIX/VIX3M reliable?⌄
Yes as a regime indicator, but mechanical thresholds can whipsaw — best combined with skew and credit signals.

Related terms

Implied Volatility

Options

Volatility Skew

Options

VIX Basis

Options

Calendar Spread

Commodities

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