Implied volatility and options term structure: comparative analysis of time skew and implied volatility surface for building trading strategies

Abstract

This paper investigates the dynamics of the implied volatility surface (IVS) and its term structure as a foundation for constructing profitable trading strategies in the options market. Contrary to the classical assumption of constant volatility in the Black–Scholes model, empirical evidence demonstrates that implied volatility systematically varies with strike price and time to expiration, thereby forming a three-dimensional surface. The study provides a comparative analysis of two key dimensions of the IVS – the term structure and the strike structure (skew) – with a particular focus on the phenomenon of volatility time shift. Based on econometric modelling employing the Nelson–Siegel factorization and principal component analysis, we propose a system of trading signals for calendar spreads, skew arbitrage, and dynamic hedging. The empirical dataset comprises options on the 500 index (SPX) over the period 2020–2025. The results indicate that incorporating the temporal dynamics of the IVS improves the risk-adjusted returns of trading strategies by 15–22% relative to strategies that rely solely on level information.