Forward volatility calculation.

[sle]

Quote from jansen_ja:

Sle, could you explain this a bit more clear, how you mean to lock forward vol?

When disagreeing with forward vol, i would just think about setting up a gamma neutral trade, then keeping it gamma neutral with slowly selling of the nearest month, done the trade with positive/negative vega, depending on your outlooks on future IV, or is this more or less the outcome from what you said above?

Well, there are a few ways to look at it, but is essense when you buy or sell a calendar, you are placing positive or negative view on the forward vol. You can set up the position in such way as to keep all of the greeks down to minimum and make it a pure vol play. An alternative (and a very nice alternative, at it) is to use a forward starting option, since it does not have delta or gamma to worry about and truly is a pure forward volatility instrument.

Quote from jansen_ja:

When disagreeing with forward vol, i would just think about setting up a gamma neutral trade, then keeping it gamma neutral with slowly selling of the nearest month, done the trade with positive/negative vega, depending on your outlooks on future IV, or is this more or less the outcome from what you said above?

Yes, that is a nice and gentle way of doing it. If you disagree with forward vol on specific skew level, it is a bit more complex.

 

[jansen_ja]

Quote from sle:



If you disagree with forward vol on specific skew level, it is a bit more complex.

Thanks sle for your contribution., i have one further question for you.
Probably i might disagree with forward vol with skew level one day...
Could you provide me with some sources where i could study this material?
there i think this stuff is all important in the attempt of making money trading options pure as a volatility trader! (and with a prof. haircut account of course )

 

[OddTrader]

A very interesting thread indeed!

Unsure how much it's practically useful yet!

 

[ajacobson]

There has, in fact, been a ton of research done on this topic. What you are talking about here is not skew it is term structure of volatility.
Short answer is do a google search of term structure to see the stuff that is published.
Long answer is short volatility is almost always higher than long vol. because short vol. is a measurement of the cost of hedging and long vol. really has a lot of the S T noise washed out of it and is closer to a measure of pure dispersion.
The reality is the answer is much more than the simple answer I've provided. Go get as much research on term structure and look through it.

 

[Martinghoul]

Here you go:
http://www.wilmott.com/messageview.cfm?catid=38&threadid=68640

This is specific to rates, but should be extendable to any asset class, really...

It's a rich subject and the world of rates is full of all of sorts of interesting things you can do about fwd vol (simply because the notion of term structure is so natural in rates). Two practical examples are: a) regular and mid-curve options on STIRs; b) FOAs (fwd option agreements) that are traded on the day before NFP (basically you can take a view on vol 1d fwd).