Is the vol term structure for indexes almost always lower IV for front months and higher for back months (barring rare events i.e. flash crash)? While I know volatility is higher in an expiration cycle where there are earnings for a stock, is it almost always true that front month IV < back month IV? If that is the case it appears that you would almost always be at a distinct disadvantage trading calendars given the negative horizontal vol skew. Thoughts?
1) Yes....until the "rare event" occurs which can then invert the skew. :eek: 2) Markets can be trendier when the term structure is positively-sloped and more mean-reverting after it turns negative.
Not necessarily because there are multiple influences on price. For ex, the near month decays faster and if both months have a similar increase in IV, the far month's price will gain more.