Why does implied volatility differ by expiration?
What does the term structure show?
Term structure describes how implied volatility differs across expirations on the same underlying. Longer-dated options normally carry higher IV than short-dated ones. Ahead of a scheduled event that often inverts, because the nearest expiration carries the expectation. Calendars and diagonals are trades on exactly that difference.
The normal shape
Line up the at-the-money IV of each expiration and you get the term structure. In calm markets it usually slopes upward: later expirations carry somewhat higher IV, because after a calm stretch the market expects volatility to drift back up towards its longer-run level. The slope is mild, often a few points across several months, and it is the backdrop against which calendars and diagonals, which buy one expiration and sell another, are priced.
When it inverts
Ahead of a scheduled event such as an earnings report, the first expiration after it carries the whole uncertainty on few days, and its IV rises far above the later ones. In a broad sell-off the entire short end climbs above the back months. Both produce an inverted, downward-sloping curve. After the event the front IV usually falls back — the volatility crush — and the curve returns towards its normal shape.
Which expiration to read
Read the IV of the expiration you trade, not an average and not the front month by default. A single headline IV for a stock is usually a blend or the front month, and it can differ from your expiration by many points. For the expected move up to your expiration, multiply the price by that expiration’s IV and by the square root of (its days ÷ 365).
The common misreading
An inverted term structure is often read as a sign that the later months are cheap. Usually it only means the front month contains an event that later months spread across more days. Comparing two IVs without the days behind them compares two different things: the high front-month number can describe a smaller move in euros than the lower number further out.
Worked example
Hypothetical numbers for illustration, not a market quote and not a recommendation.
An example stock trades at 100 € ahead of an announcement. Its 7-day options trade at a hypothetical IV of 45 %, its 35-day options at 30 %. The one-standard-deviation move to each expiration is 100 × 0.45 × √(7/365) ≈ 6.23 € for the short one and 100 × 0.30 × √(35/365) ≈ 9.29 € for the longer one.
The front month carries the higher IV, yet it prices the smaller move in euros, because it covers only a fifth of the days. Fees are ignored.
Strategies where the term matters
- Long Call Calendar — Is the near-term expiration expensive relative to the far one (a term structure in backwardation)?
- Long Put Calendar — What is your plan if the near-term short leg gets exercised early?
- Long Call Diagonal — Does the upper strike sit above the lower strike plus the debit you paid?
Calculators for this term
Track it in your journal
Related terms
Every term in one place: the options glossary.
This material is general information about option strategies, written for a general audience. It is not investment advice, not a recommendation, and not financial analysis. Options can lose their entire value, and uncovered positions can lose more than the amount committed. Anything said about tax is general in nature and is no substitute for professional tax advice. Last reviewed: 2026-08-06.