Term structure
Definition · Level 3 · Spreads & short options
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How implied volatility varies across expirations for one underlying: usually gently upward-sloping in calm markets, inverted in stress, with a bump at any expiry containing a known event. Calendars and diagonals bet on its shape.
Example
Front month at 45% before earnings, back month at 32%.
Where Tradecraft teaches it
Level 3 · Spreads & short options, in the lesson “Calendars, diagonals & the poor man’s covered call”: Time spreads: why they are long vega and positive theta, the PMCC, and legging risk.
Related terms
- Calendar Spread – DebitSell a near-term option and buy a longer-term option at the same strike.
- Diagonal Spread – Short leg expires firstSell a near-term option and buy a longer-term one at a different strike — part calendar, part vertical.
- Long vegaGaining when implied volatility rises. A debit calendar has it because the longer-dated option you own carries more vega than the near-term one you…
- Poor man’s covered callDiagonal that replaces 100 shares with a deep ITM long-dated call and sells short-dated OTM calls against it.
- BodyThe middle strike of a butterfly, short in a long fly — where a long fly earns the most at expiration.
- Breakeven win rateHow often a trade must win just to net zero, treating each outcome as a full win or a full loss: max loss ÷ (max profit + max loss), i.e. 1 ÷ (1 +…