Corporate events & settlement
What is the Implied Volatility Term Structure and how do I trade shifts between contango and backwardation?
By Easy Money Scanner · Educational reference · Not investment advice
The short answer
The implied volatility term structure plots IV across expirations; contango (rising IV with time) is normal, while backwardation (near-term IV above long-term) signals acute near-term stress, and calendar spreads trade shifts between them.
How it works
Traders buy calendar spreads expecting contango to persist or normalize, or sell near-term/buy long-term premium when backwardation looks overextended ahead of a known event.
An example
Before earnings, a stock's front-month IV often spikes above back-month IV creating backwardation, which typically reverts to contango once earnings pass.
Risk & limitations
Term structure shape can stay inverted longer than expected during sustained crises, and calendar spreads carry pin risk and assignment risk near the short leg's 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.