Is Time Synthetic Volatility?

[spindr0]

Quote from deltahedge:

I'm slightly at a loss as to how to attribute the reason as to why a put sale can be a profitable despite the underlying not moving and the IV remaining constant, yet only the passage of time.

If time was the only variable that changed in a pricing equation, what else could you attribute that change to. The number of posters on ET?

Theta isn't linear but from 200 days out until 80 days out it isn't far from it (it's accelerating verrrrry slowly). Avg the two and subtract the expected premium change and you won't be far off from the 2nd premium. So it's QED but very poorly done

 

[spindr0]

Quote from deltahedge:

On a slightly separate note, I'm wondering what is the appropriate way to assess implied volatility?

Technically it's plausible that the front months volatility drops a significant amount and the stock moves up, but the further back months volatility can remain elevated (perhaps an impending FDA decision). In light of that scenario is it fair to say IV has dropped?

If IV of the near month is lower, it has dropped. If IV of the back months remains elevated, it's unchanged. If avg IV has dropped, it's lower. With all due respect, who cares? It's the IVs of the legs you're going to play with that determines the attractiveness of the strategy you're looking at (for example, a skew situation).