Volatility Surface: Skew, Term Structure, and What They Tell You

What is the Volatility Surface?

The volatility surface is a three-dimensional map of implied volatility across all strikes (x-axis) and expirations (y-axis), with IV on the z-axis.

In a perfect theoretical world, IV would be the same for every option. In reality, different strikes and expirations trade at different implied volatilities — and those differences contain information about market expectations, risk perception, and positioning.

GammaLens's Volatility Surface tool visualizes this entire landscape for any ticker, letting you see patterns that are invisible when looking at individual option prices.

Understanding Skew

Skew refers to the difference in IV across strikes for a single expiration. In equities, put options almost always have higher IV than calls at the same distance from spot — this is called "negative skew" or "put skew."

This exists because demand for downside protection (puts) exceeds demand for upside speculation (calls). Market participants are willing to pay a premium for protection against crashes.

The steepness of skew tells you something about market sentiment:

Steep skew = high demand for downside protection. The market is fearful. Flat skew = relatively balanced sentiment. Risk appetite is normal. Skew steepening = fear is increasing. Often precedes or accompanies selloffs. Skew flattening = fear is decreasing. Often accompanies rallies or risk-on moves.

Term Structure: Near-Term vs Long-Term Vol

Term structure describes how IV changes across expirations at the same strike. Normally, longer-dated options have slightly higher IV than shorter-dated ones (contango) — reflecting the greater uncertainty over longer time horizons.

When near-term IV exceeds long-term IV (backwardation), it signals that the market expects something significant to happen soon. This often occurs before earnings, economic events, or during market stress.

A VIX spike creates backwardation in SPY's term structure. As the event passes and near-term vol collapses (the "vol crush"), the term structure normalizes.

GammaLens plots term structure alongside skew, so you can see both dimensions simultaneously and spot anomalies.

Using the Vol Surface in Trading

The vol surface is most useful for options traders making strategy decisions:

Selling premium? Look for strikes where IV is elevated relative to the surface — you're collecting more premium for the same risk.

Buying protection? Check if put skew is historically steep or flat. Steep skew means protection is expensive — consider alternative structures like put spreads.

Calendar trades? Term structure tells you whether you're paying a premium for near-term vs far-term vol. Backwardation favors calendar spreads.

Directional bets? Skew can inform strike selection. If put skew is extreme, the market is pricing in more downside risk — but it also means puts are expensive. Calls might offer better risk/reward if you're bullish.

The key is that the vol surface gives you context for relative value. It helps you avoid paying too much and find opportunities where the market may be mispricing risk.