17 lines
1.0 KiB
Plaintext
17 lines
1.0 KiB
Plaintext
previous month. A graduated increasing or decreasing IV for each
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consecutive expiration cycle is typical of the term structure of volatility.
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Under normal circumstances, the front month is the most sensitive to
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changes in IV. There are two reasons for this. First, front-month options are
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typically the most actively traded. There is more buying and selling
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pressure. Their IV is subject to more activity. Second, vegas are smaller for
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options with fewer days until expiration. This means that for the same
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monetary change in an option’s value, the IV needs to move more for short-
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term options.
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Exhibit 3.4 shows the same GM options and their corresponding vegas.
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EXHIBIT 3.4 GM vegas.
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If the value of the September 32.5 calls increases by $0.10, IV must rise
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by 1 percentage point. If the February 32.5 calls increase by $0.10, IV must
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rise 3 percentage points. As expiration approaches, the vega gets even
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smaller. With seven days until expiration, the vega would be about 0.014.
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This means IV would have to change about 7 points to change the call value
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$0.10. |