IV term structure: contango, inversion and earnings bumps

The implied volatility term structure shows how implied volatility changes with time to expiry. Plotted from the nearest expiry to the furthest, it can slope upward, with longer-dated implied volatility higher, or invert, with near-term implied volatility above longer-dated, as when the market prices a near-term event or stress.

What The Term Structure Measures

Each expiry has its own implied volatility. Lining them up by days to expiry shows how the market prices uncertainty over different horizons: next week, next month, next quarter and beyond.

How To Read It

• Upward sloping (contango): longer-dated options carry more implied volatility than near-dated ones.
• Inverted (backwardation): near-dated implied volatility is above longer-dated. This can appear around events or during market stress.
• A bump at one expiry: can reflect an earnings date or another scheduled event inside that expiry's life.

What The Term Structure Does Not Tell You

• It does not predict whether the stress will arrive or pass.
• A bump before earnings reflects the known event being priced in, not a forecast of the result.

How Vyreon Measures It

Vyreon calculates implied volatility for each expiry with its own reference model, using the carry implied by put-call parity for each expiry so dividends are handled correctly. It shows level, slope and scatter (how widely individual contracts scatter around the level and slope) per expiry for calls and puts separately, and how the profile changed over the last five sessions.

Related: implied volatility · IV skew

Sources

• John C. Hull, Options, Futures, and Other Derivatives (Pearson, many editions): implied volatility surfaces and term structure.
• James M. Patell and Mark A. Wolfson, "Anticipated Information Releases Reflected in Call Option Prices", Journal of Accounting and Economics (1979): implied volatility rising ahead of earnings announcements and falling after them.