Let’s break that down.

Term structure is comparing the difference between the volatility of two or more expiration dates.

Backwardation is when the front month volatility is higher than the back months, which is what this chart is showing.

This usually happens when there is an imminent event or there was a major move.

Buyers are coming for the nearer term expiration options. 

Why is this significant? 

Sometimes it’s hard to understand when implied volatility is expensive or cheap. 

Looking at outright implied volatility levels isn’t always a good method because historically higher/lower volatility levels must be contextualized by that historical era as well. 

This is why the term structure, along with realized volatility, is often a better gauge. 

Realized volatility is the actual volatility of the underlying over a period of time.

Long-term expirations are better estimates of the current era’s “median” volatility, while short-term expirations reflect today’s environment. 

Therefore the shape of the term structure is a better way to gauge peaks and valleys.