Volatility term structure

In quiet conditions near-dated options imply less volatility than long-dated ones, because the market assumes today's calm cannot last. When something frightening happens the curve inverts: the front month spikes while the back barely moves, since the shock is expected to resolve.

Calendar and diagonal structures are direct bets on this curve. Selling the rich front month and owning the cheap back month is a term-structure trade, and the risk is not price but whether the curve normalises before the short leg expires.

Example: XYZ 7-day implied volatility 22%, 30-day 25%, 90-day 27% — a normal upward slope. After a profit warning the same chain reads 58%, 41%, 32%. Inverted, and the front month is now the expensive one to sell.

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Rolling a futures position forward. Every futures contract has an expiry date, so a trader who wants to stay in the market closes the front-month contract and opens the next one. That swap is the roll, and the two contracts rarely trade at the same price.