Volatility Term Structure

Discussion in 'Options' started by deltahedge, Mar 9, 2011.

  1. Is the vol term structure for indexes almost always lower IV for front months and higher for back months (barring rare events i.e. flash crash)?

    While I know volatility is higher in an expiration cycle where there are earnings for a stock, is it almost always true that front month IV < back month IV? If that is the case it appears that you would almost always be at a distinct disadvantage trading calendars given the negative horizontal vol skew.

    Thoughts? :)
  2. 1) Yes....until the "rare event" occurs which can then invert the skew. :eek:
    2) Markets can be trendier when the term structure is positively-sloped and more mean-reverting after it turns negative. :cool:
  3. It works like a moving averages for stocks , just in opposite direction for VIX
  4. spindr0


    Not necessarily because there are multiple influences on price. For ex, the near month decays faster and if both months have a similar increase in IV, the far month's price will gain more.
  5. Ask "the quants" in 2008...