Term structure: volatility has a shape in time
A single implied volatility number is a point. The market quotes a curve. The slope of that curve — whether the near expiry is cheaper or dearer than the far one — carries more information than the level does, and it is the fastest way to know whether the market is calm, frightened, or pricing a date on the calendar.
What is term structure? The volatility term structure is the curve of implied volatility plotted against time to expiry. When it slopes upward, near-dated options are cheaper than long-dated ones and the market is in contango, its normal calm state. When it slopes downward it is in backwardation, which signals current stress the market expects to subside.
Forward Volatility
Forward volatility is the volatility the option market implies for a future window between two dates T1 and T2, extracted from the two spot implied volati…
What is Term Structure?
Term StructureThe volatility term structure is the curve you get when you plot at-the-money implied volatility against days to expiry — and its slope, not its level, te…
Contango
ContangoContango is the market's default state, in which the volatility term structure slopes upward — near-dated implied volatility trades below long-dated — so …
Backwardation
BackwardationBackwardation is the inverted volatility term structure — near-dated implied volatility trading above long-dated — that appears in selloffs and crises whe…
Calendar Structure
CalendarCalendar structure is the implied-volatility relationship between two expiries that a calendar spread actually trades — sell a near-dated option, buy a fa…
Expiry Structure
Expiry structure is the implied volatility read off each individual listed expiry of an index, and on NIFTY it forms a saw-tooth — every weekly and the mo…
Volatility Curve
Volatility curve, in the sense that matters to a volatility trader, is the volatility cone — the historical distribution of realised volatility plotted fo…
Event Premium
Event premium is the extra variance that a single scheduled event — an RBI decision, the Union Budget, election counting — injects into an option's total …
Rolling Volatility
Rolling volatility is the realised volatility of an underlying computed over a moving window of the most recent days, re-estimated each day as the window …