Calculation and mechanics
For each expiry, the Implied Volatility of the at-the-money options is determined and plotted over the days to expiry. If the IV of distant expiries is higher, the term structure rises. If short-dated IV is higher, it falls.
In calm market phases short-dated IV often sits below the IV of longer maturities. If the market expects elevated movement in the near term instead, that relation can invert. Known events such as quarterly results or a rate decision can also affect single expiries markedly: the IV of the options that span the event rises and can form a visible hump in the term structure. After the event that extra premium typically disappears again.
Distinction
The term structure describes how IV differs across maturities, skew how it differs across strikes. Together they form the volatility surface.
IV Rank and IV Percentile, by contrast, compare the current IV with its own past. Foliograph uses the 30-day IV for that.
Related terms
- Implied Volatility (IV)
- Expected Move (EM, one standard deviation move)
- At-the-Money Straddle (ATM straddle)
- VIX Futures Curve (VIX term structure, VX contracts)
- VIX3M and VIX/VIX3M Ratio (CBOE 3-Month Volatility Index, formerly VXV)
All market and analytical information is provided for educational and analytical purposes only and does not constitute investment advice or a trading recommendation.