Probably the first 4 months. For that kind of trade though. I'm in the front for different reasons usually.
Double Butterfly spread
- Thread starter cdcaveman
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here is a question.... if your in the front month spread in some fashion.. what defines if your long or short volatility.... most vol is up with crude as seen with options call skew.. but not necessarly, as vol can go up with the underlying going down... so how can you even trade the front spread directionally as sometimes a bull spread losses money in a rally.... and thereof there is no direct expression of being long or short volatilty in the front spreads or maybe even the back spreads really
Whoever said anything about vol though? I thought these were trades purely based on the technicals of future expectation of price and how the interrelationships play out across the curve. Additionally by moving away from front months it seems like an attempt to reduce the effect of front month volatility as well.
no one said anything about volatility , but me.. i was just bringing it into the conversation... Obviously the farther you get away from the front the vol goes down in a general sense.. but i was curious how one would define volatility in any respect relative to this kind of trading... take for example a zm spread which is obviously 6 months.. this spread is going to be some x number of hj's inside the spread.. what coefficient do you set up to set some equalization of the two spreads.. He was saying 6x ... i asked him about how he built that function.. i never got a very quantitative response.. it begged the question about volatility... volatility is a function of time to maturity but not in the typical sense as you can't short volatility in a typical sense .. like you can short a front month spread , and be short volatility .. . you get exposure to more volatility in your trade if you are closer to the front.. but there is no way to construct a purely long volatility play with futures... volatility and extremely volatile events create dislocations and these are the ones i trade.. i have never figured out how to directly profit from a any sort of "long" volatility play.. just react to volatility as it comes into the market.. i'm strictly talking futures here..
Well I'd figure that if you've observed volatility to create dislocations in the curve and you trade off of that (presumably by fading it) then wouldn't it be the same in reverse in that you're anticipating the dislocation from a presently normal curve?
Just like if one buys an ATM straddle, they're anticipating vol to increase and if selling anticipate it to decrease - both are dependent on volatility itself. The dislocated curve form seems to be a derivative effect of that.
Just like if one buys an ATM straddle, they're anticipating vol to increase and if selling anticipate it to decrease - both are dependent on volatility itself. The dislocated curve form seems to be a derivative effect of that.
I don't think it translates directly such that you can make an expression that is essentially "long" volatility.. for one the entire curve can flip and go backwards throwing a curve ball. The only true way to think about it in terms of options volatility would be if you could trade options on spreads... like a call option on the spread.. such that if you would have the right to buy the spread at a particular strike, and with the volatility of that spread going up the call option would go up or the implied vols of the call option would go up.. on other intercommodity spreads there are spread options, and i'm not sure how those are synthesized such that a desk could sell them and hedge the risk out..and if i did find out i'm not sure i could use that syntheisis to create my own expression... these are just my thoughts... i'll have to find some papers on spread option pricing, and see if anythign comes of it.. this is just educational anyway... i might learn something useful in a totally irelative of oil spreads... like the guys that found viagra
IMO I wouldn't even try to worry about that angle. It's too derivative and likely not something you'll be able to easily model or control.
There are spread options on calendars, they're called CSOs. I do know ICE has options on the WTI/Brent spread as well. As far as hedging them, I'd imagine a seller would be looking to hedge deltas by using the underlying spread itself. Not even remotely sure how you'd make long or short vol plays other than measuring and observing IV on the underlying spread somehow.
There are spread options on calendars, they're called CSOs. I do know ICE has options on the WTI/Brent spread as well. As far as hedging them, I'd imagine a seller would be looking to hedge deltas by using the underlying spread itself. Not even remotely sure how you'd make long or short vol plays other than measuring and observing IV on the underlying spread somehow.