What the Holiday Implied Volatility Term Structure Is Telling Us

At first glance, the SPX implied volatility term structure heading into year-end does not appear particularly unusual.

Across expirations from late December through early January, implied volatility levels sit broadly in the high single digits to low double digits. Day-to-day differences across expirations are measured in tenths of a percent. On the surface, nothing appears meaningfully out of line.

However, when those same implied volatilities are normalized correctly for time, variance, and non-trading days, a very different picture emerges. The options market is currently pricing a large concentration of risk into a specific trading session, rather than signaling a broad shift in the volatility regime.

This type of distortion is most common around holidays, shortened trading weeks, and clustered macro events. And it is exactly the kind of setup where raw implied volatility levels can be misleading.

Raw Implied Volatility Can Hide Concentrated Risk

Looking at unadjusted SPX implied volatility from December 23 through mid-January, front-end IV generally ranges from approximately 9 percent to 11 percent.

In isolation, those numbers do not stand out. Traders scanning the term structure quickly may conclude that volatility is subdued and evenly distributed across expirations.

The problem with that interpretation is that implied volatility does not scale linearly with time. Risk is not distributed evenly across calendar days. And non-trading days are not risk-free simply because markets are closed.

To properly compare implied volatility across expirations, time must be modeled realistically.

Why Time Modeling Matters Around Holidays

At ORATS, time to expiration is not treated as a simple count of calendar days or a binary count of business days.

Instead, time is modeled as a blend.

Trading days carry full weight.

Non-trading days still carry risk, but at a reduced and empirically derived level.

This approach reflects observed market behavior. Weekends, holidays, and overnight gaps consistently exhibit more realized movement than a pure calendar-day model would imply, particularly around macro events and periods of thin liquidity.

Holiday weeks amplify this effect.

Liquidity tends to be thinner. Positioning can become more lopsided. Overnight gaps matter more. As a result, implied volatility relationships often distort around holidays and half-days, even before any scheduled events are considered.

This is why blended time modeling is critical when comparing expirations that straddle long weekends or holiday periods.

The Role of Variance Concentration

Volatility is quoted in percentage terms, but variance, which is the square of volatility, is the quantity that aggregates through time.

When the market expects multiple days’ worth of uncertainty to resolve in a single session, variance becomes concentrated. Small changes in implied volatility can therefore correspond to very large changes in expected risk.

This distinction is central to understanding what the current SPX term structure is signaling.

December 31st: Event Risk Meets Holiday Structure

On Wednesday, December 31st, markets receive multiple high-impact labor-related releases.

Initial Jobless Claims are released at 8:30 a.m. ET, followed shortly by Chicago PMI.

These reports directly influence rate expectations, risk sentiment, and index-level positioning. Importantly, they are scheduled to arrive during a holiday week with reduced trading hours and thinner liquidity.

When ORATS’ volatility models adjust implied volatility for blended time and variance, the result is striking.

Although raw implied volatility rises modestly, the normalized distortion indicates that approximately double the normal daily variance is being priced into that single session.

In other words, the options market is not pricing a gentle increase in uncertainty. It is pricing a significant compression of risk into one trading day.

Why This Matters for Options Traders

This type of setup highlights why focusing exclusively on implied volatility levels can be dangerous.

A small change in IV does not necessarily imply a small change in risk.

Term structure shape matters more than absolute IV levels.

Calendar placement of risk can dominate strategy outcomes.

Holiday periods and macro clusters are precisely where these effects tend to surface. Traders who ignore variance concentration and blended time effects may misinterpret “low” volatility as benign, when the market is actually signaling heightened event-specific risk.

Reading the Term Structure Correctly

What the current SPX term structure is telling us is not that volatility is broadly elevated. It is telling us that the market is very specific about when risk is expected to occur.

That distinction is critical.

By modeling time realistically, accounting for non-trading days, and normalizing variance appropriately, it becomes possible to see what the options market is actually pricing, rather than what headline IV numbers appear to suggest.

Right now, the market is pricing a lot of risk, and it is placing it very deliberately on the calendar.