Considering it is 4 months out you might not see any hump in the term structure - Especially because biotechs usually have very high non-event vol. Remember, volatility is the average of the daily standard deviations. So lets say the daily non event standard deviation is 4% and the implied 1 day event standard deviation is 15%. For a 4 month option (120 days). The implied volatility without the event would be 4%*16 = 64% With the event, the average daily move would be (4*119 + 15)/120 = 4.09%. If we multiply 4.09 by 16 we get 65.4 So for the term structure you would probably see something like: Sept<-64 Oct<-64 Nov<-64 Dec<-65.4 Jan<-65 Feb<64.5
Theoretically the IV would be highest in the expiration of the event. But this isn’t the rule, and sometimes higher vol is a back dated month. the question would be, how much conviction do you have of this fundamentally binary knowledge and how can you profit off this? Maybe trying a calendarized butterfly? Buy the wings in the lower IV surrounding the higher IV (body) binary event. Maybe break the wing or skip a strike to provide bias, and maybe even choose unbalanced contracts (132/231/253/352) to show bias to the term structure.
Same question here. I have a question for both of you: how do I calculate the probability distribution function of a binary event assuming Gaussian distribution? The combination of two Gaussians each centers around the outcome? Is the sum of two Gaussians a Gaussian? Thanks.
Only because it's so far out - It's being diluted by the non event vol. This is where the scammy "iv ramp" that a lot of vendors push comes from.