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Volatility term structure
       
 
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Volatility term structure

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Volatility term structure
The term structure of Volatility is the curve depicting the differing implied volatilities of options with differing maturities. Such a curve arises partly because Implied volatility in Short options changes much faster than for longer options. However, the Volatility term structure also arises because of assumed Mean reversion of Volatility. The effect of changes in Volatility on the Option price is less the shorter the Option. Most market-makers take advantage of differing volatilities to Hedge their books or to trade perceived anomalies in Volatility. Such strategies have to be weighted because of the differing Vega effects.

See also Implied volatility
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