Reading the market
Term structure inversion: the regime signal nobody talks about
When near-term IV spikes above long-term IV, the market is telling you something specific. Knowing what shifts what trades you should be running.
is just the IV curve across expirations. Most of the time, near-term options have lower IV than long-term options. That is contango, the normal state. The market expects more uncertainty over longer horizons, so it prices longer options at higher IV.
Backwardation is the opposite. Near-term IV jumps above long-term IV. The market is pricing immediate, specific fear. Earnings coming up, geopolitical event, FOMC meeting, or something less identifiable but real to the order flow.
Term structure inversion is the market saying "something is going to happen this week" in the only language it has.
What it means for your trades
- Front-month premium is rich relative to back-month. Selling short-dated premium against long-dated long premium becomes attractive: that is a calendar spread, and it is the textbook response to backwardation.
- Outright credit spreads in the front month look fat for a reason. Take them only with hedges and with eyes open. The fat credit usually pays for the fat tail risk.
- Long-dated long-vega trades are temporarily cheap. PMCCs become more attractive on a relative basis.
How long inversions last
Most index inversions resolve within a week or two. Single-stock inversions usually resolve through earnings or the catalyst they were pricing. The trade is to enter when inversion is fresh and exit when it normalizes, not to chase it midway.
What to do next
Open the scanner's term structure section. The flagged names are showing front-month IV above back-month IV. For each one, check the earnings calendar and the news. The inversion almost always has a story.