Ive been looking into calendar options and found a few articles that talk about looking at skewness. The concensus seems to be between a +5/6% and a -2% skew. A pretty basic question but which way does the positive skew refer to? the front month 6% above the later month?
In a calendar you short the front month and buy the back month so you want the font month vol to be above the back month.
yeah, I understand that, but when front month IV is above back month IV, is that positive or negative skew? Thanks
I came across a few different sources and they all pretty much suggested a similar range of +6% to -2% skew for selecting potential calendar spread candidates. Im just trying to figure out which side a positve skew woud be.....
Well, based on what I mentioned earlier and the fact that +6% to -2% is the "suggested" range, I'd say that the positive skew would be front month higher than back month and vice versa.
I'd agree with MTE... In a calendar, you short the front month and buy the back month so you want the font month vol to be above the back month. Since a sale is a credit and a purchase is a debit, if the near month's IV is higher than the far month then you have a net positive number which is desirable. The opposite would be true for reverse calendars but you didn't ask about them
WEll I guess thats logical. I know that RE vertical skews Positive skew refers to getting higher IV as you move away from ATM , just wanted to make sure I had horizontal skew the right way round.
You're not really talking about "skew" you're talking about the shape and slope of the volatility curve. The term skew generally refers to the difference in IV of the OTM puts vs. the ATM and the OTM calls. I would hate to generalize the vol curve and try and fit that generalization to any individual stock or index.
Thanks Xflat. So comparing current 'volatility skews' (as Ive reffered to them) with average skews would be a better indicator then?