Definition

The “Term Structure Richness” endpoint is the relative level of the Contango or Backwardation shape. The metric represents the difference between the implied volatility of two options with the same delta, but different expiration dates. It also provides insight into the relative expensiveness or cheapness of options at different maturities within the volatility term structure.

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Details

The term structure richness calculation is as follows:

Term Structure Richness = IV(Longer-dated option) - IV(Shorter-dated option)

Where:

• IV(Longer-dated option) is the implied volatility of the option with the longer time to expiration.
• IV(Shorter-dated option) is the implied volatility of the option with the shorter time to expiration.

Both options are selected to have the same delta value (e.g., Δ25 call or Δ25 put) to ensure a consistent comparison of options with similar risk profiles.

The term structure richness metric can be interpreted as:

1. Positive Value: The longer-dated option is relatively more expensive (or "richer") compared to the shorter-dated option.
2. Negative Value: The shorter-dated option is relatively more expensive (or "richer") compared to the longer-dated option.
3. Zero Value: The options are fairly priced relative to each other within the term structure.

For example, a reading of 1.00 would be a perfectly flat term structure - as measured by our method - while readings below/above represent Contango/Backwardation respectively. Using the term structure levels enables us to quantify how extended the term structure pricing currently is, at any point in time.

The calculation uses a weighted average of the 7-dte, 30-dte, 60-dte, 90-dte and 180-dte at-the-money volatilities.

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Availability

/Term Structure Richness

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