Implied Volatility on Verticals

A

AlphaLine

Hi: Is there a preferred volatility range to enter a vertical?

I understand volatility in selling naked that the advantage is selling when volatility is high. However in a vertical, both the sell and buy are similar in volatility. So since they (both positions) are paired, is volatility a concern if entering this position.
 
Verticals are directional plays if they are 1:1. If you ratio it, then it's directional and buying/selling vol.
 
Once you split months, it is directional and has a vega component. Typically you will enter a trade like that because one month is higher/lower than another and you expect the underlying to move toward a strike where one expires and the other still has value. Most of those set ups are created from events like earnings, where one month is higher than another, for a reason. If you are to hold the spread until after the event, you have to simulate what the spread will be worth after the event, when Ivol "normalizes." Then you have to have an expectation of where you think it will trade then.

In my opinion, these are not consistent money makers unless you can have a high expectation of where the stock will trade or won't be. Sometimes it's easier to determine where it won't trade. This is why OTM credit spreads work well.
 
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