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+Buying the Front, Selling the Back
+All trading is based on the principle of “buy low, sell high”—even volatility
+trading. With time spreads, we can do both at once, but we are not limited
+to selling the front and buying the back. When short-term options are
+trading at a lower IV than long-term ones, there may be an opportunity to
+sell the calendar. If the IV of the front month is 17 and the back-month IV is
+25, for example, it could be a wise trade to buy the front and sell the back.
+But selling time spreads in this manner comes with its own unique set of
+risks.
+First, a short calendar’s greeks are the opposite of those of a long
+calendar. This trade has negative theta with positive gamma. A sideways
+market hurts this position as negative theta does its damage. Each day of
+carrying the position is paid for with time decay.
+The short calendar is also a short-vega trade. At face value, this implies
+that a drop in IV leads to profit and that the higher the IV sold in the back
+month, the better. As with buying a calendar, there are some caveats to this
+logic.
+If there is an across-the-board decline in IV, the net short vega will lead to
+a profit. But an across-the-board drop in volatility, in this case, is probably
+not a realistic expectation. The front month tends to be more sensitive to
+volatility. It is a common occurrence for the front month to be “cheap”
+while the back month is “expensive.”
+The volatilities of the different months can move independently, as they
+can when one buys a time spread. There are a couple of scenarios that might
+lead to the back-month volatility’s being higher than the front month. One is
+high complacency in the short term. When the market collectively sells
+options in expectation of lackluster trading, it generally prefers to sell the
+short-term options. Why? Higher theta. Because the trade has less time until
+expiration, the trade has a shorter period of risk. Because of this, selling
+pressure can push down IV in the front-month options more than in the
+back. Again, the front month is more sensitive to changes in implied
+volatility.