Re: [TheOptionClub.com] IV/VIX question

 

--- In OptionClub@yahoogroups.com, "Jack" <jack@...> wrote:
>
> It's earnings season. Earnings affects the near month (short options) more
> than the far month.
>
> I've started trading option (SPX calendars and iron condors) recently and
> I've been always making this simplification that I can expect calendar to go
> up in value by more-less change in VIX multiplied by Vega of the calendar
> (in TOS you can adjust volatility on the risk chart and that's what I've
> been doing). However it never works like that - today was the second time I
> lost money with a calendar on a down day with VIX shooting up - first one
> was in October. IV of the near month option goes up and far month option's
> IV stays put or goes down a bit. I don't understand that and would like to
> learn more about this. What would be a good place to start?

Hi Jack:

It's called supply and demand. The demand for the near term puts is greater than the demand for the far term puts. If the market comes to believe that we will be moving into a higher volatility environment, then the back month puts will start getting pumped up. Remember, the implied volatility of an option is backed out from the price of an option. What drives the price of an option?

For this reason, back month options don't get pumped up like front month options normally do at earnings because the market believes that the volatility will dissipate after earnings come out. So the question is whether or not the market believes that the higher implied volatility is here to stay or not. The answer lies in the price of the options in the back months.

Cheers

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