Time / Diagonal Spreads & Future Option Trading (part 1)

by David Jenyns on January 24, 2006

Time / Diagonal Spreads & Future Option Trading (part 1)
To be able to calculate the volatility of the spread, we must equalize the volatilities of future option trading. First, lets move the June calls by moving Junes implied volatility down from 40 to 36, a decrease of four volatility ticks. Four volatility ticks multiplied by a vega of .05 per tick gives us a value of $.20. Next we subtract $.20 from the June 70 commodity option trading value of $2.00 and we get a value of $1.80 at 36 volatility. Now we find the two future option trading at an equal volatility basis.

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