Calendar & diagonal spreads
What is the impact of volatility term structure (contango vs backwardation) on calendar spread pricing?
By Easy Money Scanner · Educational reference · Not investment advice
The short answer
When the volatility term structure is in contango (longer-dated IV higher than near-term), back-month options are priced richer, which typically raises the cost of long calendar spreads versus backwardation.
How it works
In backwardation, near-term IV exceeds longer-term IV, often during event-driven stress, which can make calendar spreads cheaper to enter but also signals elevated short-term uncertainty that raises gap risk.
An example
During calm markets with term structure in contango, a calendar spread may cost more to open than during backwardated conditions around a pending earnings date.
Risk & limitations
Term structure can shift quickly around news events, and a spread entered in one regime can become mispriced if contango flips to backwardation or vice versa before expiration.
Examples are hypothetical, not trade recommendations. US contract and regulatory references do not automatically apply in Canada. Rules, margin requirements and broker policies can change; confirm them with the relevant authority and your broker.