moot, dumb*ss (j/k) I like this thing, but I played it small. I'm short a 10-lot. Any other tickers you want to mention, Mav?
Question...on a calendar, if the IV skew is so large on the front month, won't the back month be less affected by a vol implosion? I've seen a few cases in the past few weeks were front month vols imploded and back month vols either rose or stayed the same. Any thoughts?
I don't want to broadcast my picks to the world. I can PM them on request as long as people don't take them and post them on an ET thread.
More often then not long term vols come in pretty hard. Vol has a time structure just as they do a price structure. The reason the skew is more pronounced on the front month is due to the correlation of time and risk. The further you go out, the more time, the less risk. However, that does not mean those vols are cheap or that they won't come in hard after a report. They will due to the relationship between time and price. Think about it. If you reduce the risk over the short term and time has a skew then shouldn't the whole curve drop? The answer is yes it should. There are cases where maybe the back months don't drop as much in vol or stay flat and maybe even rise on rare occasions, but more often then not this is a temporary phenomena. They will drop very soon, just maybe a few days later. In many cases this can be attributed to short term long option holders rolling over their options to a further out month.
Mav, Thanks for the explanation -- makes a lot of sense. In situations where front months have much lower IVs than the back months (take MMM for example right now....I'm seing between 12%-15% on the front months, and between 20%-30% in the Jun and Jul contracts) -- what is the market saying -- that they expect less risk in the immediate months? Thanks.
Risk, just for you, I'll send you some tickers later on. MyDemaray, many times vol will be priced in the month where there is a risk. Take stock XYZ. It has a FDA decision coming in June let's say. The may vols maybe priced really low because there is no risk in the May options. But the June and July's maybe be priced much higher for obvious reasons. You will see this with earnings reports too. If a stock is reporting in July, you will see the July's trade at a premium the the June vols, again for obvious reasons. In general vol should be priced a little higher as you go out assuming the front month vols are low due to the uncertainty of time.