IV Term Structure: What the Curve Across Expirations Is Telling You
One ticker, one moment, many different IVs
Pull up a chain and it's tempting to think of "implied volatility" as a single number attached to a stock. It isn't. Every expiration listed for that ticker carries its own at-the-money IV, and those numbers are usually different from each other — sometimes by a lot. Plot the ATM IV for each expiration against its days-to-expiration and you get the IV term structure: a curve, not a point. It's a different axis than volatility skew, which measures how IV changes across strikes within a single expiration. Term structure measures how IV changes across expirations at the same strike distance from spot.
The normal shape: contango
Under calm conditions, the curve slopes upward — near-term IV sits lower, longer-dated IV sits higher. This shape is called contango, borrowed from the same term used for upward-sloping futures curves. The logic is straightforward: more time to expiration means more time for something to happen, so the market prices in more uncertainty. It also reflects mean reversion — realized volatility tends to drift back toward its long-run average, so a calm current environment doesn't get extrapolated indefinitely into near-term pricing, while longer-dated contracts have to price in the possibility that calm doesn't last.
When it flips: backwardation around a known event
The curve inverts — near-term IV rising above longer-dated IV — when a specific, dated event sits inside the near-term expiration but not the later ones. Earnings is the textbook case: the expiration that captures the earnings date gets bid up because it has to price a binary, high-magnitude move that the next-but-one expiration doesn't share in the same way. FDA decisions, contested court rulings, and scheduled macro releases produce the same shape. This is backwardation, and it's a direct, visual signal of where the market has concentrated its expected event risk.
Once the event passes, that near-term hump tends to collapse fast — the well-known IV crush — and the curve typically snaps back toward its normal upward slope. The event didn't just resolve; it stopped being uncertain, and the near-term contract's extra volatility premium had nothing left to justify it.
Calendar spreads are a direct bet on the curve
A calendar spread — selling a near-dated option and buying a longer-dated option at the same strike — is one of the few structures that expresses a view on the shape of the curve itself rather than on price direction. The near-dated leg decays faster (higher theta, higher gamma) while the long-dated leg holds more of its value and carries more vega. If the near-term IV that made the front month rich comes back down as expected — most cleanly, right after an earnings print — the front leg loses value faster than the back leg, and the spread widens in the trader's favor. The risk cuts the other way too: if the underlying makes a large move, or the curve doesn't normalize the way the setup assumed, both legs move together and the edge from the curve shape can get overwhelmed.
Reading the curve in practice
The fastest sanity check: compare ATM IV across the next three or four real expirations for a ticker, not just the single headline IV most quote screens show. A smooth upward slope is contango — the default, no scheduled catalyst priced in unusually. A hump in one specific expiration is backwardation — check the calendar for that date before assuming it's mispriced. You can walk this directly in OptionScope's option chain, where every listed expiration shows its own IV instead of forcing you to infer the shape from a single summary figure.