There are two main types of term structure: Backwardation and Contango. Backwardation is when the near term expirations have a higher IV than the further out expirations. Contango is more common, this is when the near term expiration has a lower IV than the longer dated expiration.

Term structure simply displays the ATM IV of different expirations. In the example below, it looks like 17DEC ATM IV is around 78-ish, and 28Jan22 is over 85 IV.

In our case, maybe 15DEC has a 100IV and 28Jan22 has a 70IV, that would be backwardation.

Backwardation has a positive roll, meaning as the near term strike expires the next strike's IV should "roll" up (increase). Contango has the opposite effect, as the close strike expires the next strike's IV falls off.

For example, Backwardation 14DEC21: IV 80  -> Expires The same day 31DEC21 becomes the next strike to expire. 31DEC21: Current IV is 75 but as it becomes the nearest strike its IV "rolls up" to 80.

If we know Vol is a mean reverting asset class we can use term structure to our advantage. For example if there is an odd hump in term structure, we may consider selling the oddly high vol and buying the low vol. (this is not financial advice, we advise you to do your own research).

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