Term Structure

Within the Term Structure tab, you can customize the features and views to understand how implied volatility differs across all expiration dates for at-the-money options. This helps traders understand how short-term market volatility compares to long-term expectations. The Term Structure, with an interactive chart showing Implied Volatility for at-the-money options to see how expectations of volatility shift over time.

The Interactive Graph provides the ability to slide the scale across the bottom of the chart to adjust the time frame. This timeframe will default to 3 months, although the window can be adjusted to display between one day and one year. At any time, users can select the download icon at the top right of the chart to save a snapshot of the current chart.

Personalizing the Term Structure Tab

To adjust your viewing pane, you can use your mouse to highlight a specific area of the chart. To exit out of that view and reset the chart, you can click the Zoom Out icon at the top right, which will again display the term structure across all available expirations. 

SpotGamma subscribers can choose to see the Term Structure visualized using either the default Expiration Date Toggle, which shows the X-axis in terms of true dates of options expiration, or Days to Expiration, which shows the number of days until the options expire. With the default view set to Expiration Date, there are three overlays that can be added to the graph:

• Forward Implied Volatility Adjustment
• Statistics
• Economic Events

First, the Forward Implied Volatility Adjustment forecasts where Implied Volatility should be when you adjust for time. When the lighter adjusted line lies above the Implied Volatility curve for a given date, that means we expect volatility to actually be higher than the current Implied Volatility suggests for that date. This indicates a potential options mispricing.

Conversely, when the Forward Implied Volatility Adjustment line is below the darker Implied Volatility curve, we expect volatility to be lower than the Implied Volatility for that date. Next, the Statistics view is toggled on by default in the Term Structure chart, showing an overlay of the 10th to 90th percentile range of historical Implied Volatility for options with the same days-to-expiration; this range represents where Implied Volatility typically falls. If the term structure reading falls above this range for a given date, that indicates Implied Volatility is above the 90th percentile. However, if a point on the term structure falls below this range, that means we only observe Implied Volatility this low in less than 10% of historical expirations.

Lastly, the Economic Events Overlay flags dates of significant economic events that may affect volatility for dates with meaningful financial news. 

Below these toggles, users can Add Additional Dates to compare term structures of Implied Volatility against prior days, as measured at close. For example, users can select a date from the week prior, showing how the Term Structure has shifted over the previous week, and indicating whether the market’s expectation of volatility has increased or decreased in this time period. When viewing the Term Structure with the Days to Expiration tab selected at the top of the settings window, we can see the same customizations are possible, with the exception of the Economic Events Overlay.

One final note is that this tool leverages Real-Time Data when the current day’s term structure is being viewed, with end-of-day data used for prior dates.