The entire position would be closed before earnings, so we wouldn't actually be there for the jump. Assume the underlying is unchanged or we're delta hedged against any price movements. The back month would see increasing implied vol as we near earnings, while the front month would see unchanged or decreasing vol. Wouldn't the strategy actually perform better if the jump is overpriced, since the back month vol would see a bigger increase as we approach earnings?
The calendar spread
- Thread starter TheBigShort
- Start date
The short month expires before earnings, so I imagine it wouldn't have the expected earnings move priced into its vol.
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I have a journal going where I implement this strategy. Let's say the jump is priced at a 5% move but we think as earnings near the implied jump will be 7%. Then it makes sense to buy the back month. We only sell the font month if we think the realized vol will be less than the ambient vol. If we think the realized vol will be greater than the ambient vol, why sell the front month? Buy the back month and gamma scalp into earnings.
TBS, would you happen to have any links to these articles? Dredging up an old thread, I know, but I only recently came across it so I figured I'd check.
Thx.