Calendar Straddles for Trading Forward Volatility
Summary
The document considers selling a nearer-dated straddle and buying a later-dated one to gain exposure to volatility over a future period. This is described as an options calendar spread: approximately offsetting deltas can limit immediate directional exposure, while the position remains sensitive to the volatility term structure. With equal contract counts, the nearer option’s faster time decay may benefit the spread, but the net outcome depends on volatility and how the underlying moves relative to the strike.
The discussion notes that a large underlying move can reduce sensitivity to the intended forward-volatility exposure, while realized volatility between the two implied levels can produce losses on both legs between delta adjustments. A forward variance swap is mentioned as a more direct structure, though access may be limited for retail traders. No pricing details, hedge ratios, transaction costs, or empirical performance are supplied, so the description is conceptual rather than a complete trade specification.
Key ideas
- A short near-term and long later-term straddle form a calendar spread with exposure to the volatility term structure.
- The two straddles’ deltas may roughly offset, but the position retains volatility and underlying-price sensitivities.
- The spread’s forward-volatility exposure is greatest when the underlying remains near the strike.
- A forward variance swap can provide more direct exposure to volatility over a future interval, though access may be limited.
- The document gives no hedge ratios, transaction-cost analysis, or performance evidence.
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Full text
# Future Volatility Trading
# Future Volatility Trading
I want to find a way to long volatility of a future time period such as longing (march,april) vol from today. My idea is to short a straddle for march and long one for April for example. Will that work, what type of exposure will I get?
## Answer by siou0107 (score 1)
https://quant.stackexchange.com/a/49982
A priori, I see no large risk on the underlying on your trade, since the (roughly null) deltas on both trades will offset each other. The breakeven move on a straddle is $\left|\tilde{\sigma} S \sqrt{\Delta t}\right|$; you should just have a residual exposure on the term structure of volatility.
Suppose that at some point $\tilde{\sigma}_\text{March} > \tilde{\sigma}_\text{April}$. If between two delta-rebalancings, your realised volatility is between the two, you will lock in a loss on both trades: gamma loss on the April straddle and theta loss on the March straddle.
## Answer by dm63 (score 1)
https://quant.stackexchange.com/a/49986
Your strategy is called an options calendar spread (plenty of literature exists that you can consult). Basically, you do indeed have exposure to the implied volatility during the forward period (March-April in your example). Assuming you execute the same number of contracts of each, you will also receive time decay as the March option decays faster than the April. An important consideration is that your exposure to the forward volatility depends on where the underlying goes. If the underlying stays near the strike , you will have a large exposure to the forward volatility. If the underlying moves a long way from the strike in either direction, both options will be deep in the money, and you will have minimal exposure to the forward volatility.
To get a pure exposure to the forward volatility, you would have to execute a more exotic structure, such as a forward variance swap from March to April, which some dealers may offer. If you are a retail investor , you may not be able to access this strategy.Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.