[TheOptionClub.com] Re: IV/VIX question

 

--- In OptionClub@yahoogroups.com, "Dawid Kozlowski"
<dawid.kozlowski@...> wrote:
> 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.

Well, Jack's already mentioned that earnings will affect the vol for the
month in which the announcement takes place, but not the following
month(s).

Another reason for increased vol in the near month and little change in
the far month could be that traders don't believe the higher vol is
going to last -- maybe it's driven by a one-time news event, it's an
overreaction, etc. -- and that things will settle down before long.

Either way, you do have to keep an eye on the vol for each leg
separately. If the long leg's IV drops significantly, you might want to
reconsider whether this particular trade is still a good bet. I've had
a calendar or two that has just kind of gradually sunk underwater...

Martin

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