Trading Implied Volatility - An Introduction (Volcube Advanced Options Trading Guides) by Simon Gleadall

Author:Simon Gleadall [Gleadall, Simon]
Language: eng
Format: mobi
Publisher: Volcube
Published: 2014-01-26T23:00:00+00:00

So a variation on the strategy ‘trade implied vol over earnings, straight, by buying or selling’ might be ‘trade implied vol calendar spreads over earnings’ to aim to capture edge from the term structure changes rather than the outright implied vol change.

Typical method of execution

Horizontal calendar spreads involve trading options of the same strike but different expiration, one long, one short, in equal quantities. These are pretty direct ways to gain exposure to the calendar. Notice too that an at-the-money horizontal spread is delta neutral; for example, with the spot at $100, buying the June-July $100 call calendar spread usually means buying the July $100 calls (with a positive 50% delta) and selling the June $100 calls (which brings a -50% delta to the portfolio, by selling a positive delta option). Such a position will be short gamma, since there is more gamma in the nearer term options which have been sold short. It important to be aware of the precise underlying; some options may have futures contracts as their underlying product and if the option calendar legs refer to different expiration underlying futures contracts, a synthetic delta-spread position in the futures contracts might be acquired by trading a ‘delta-neutral’ calendar spread.

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