Select Page

Typically, volatility skews for calendar spreads between 10% and 25% work best.

Be suspicious of volatility skews between 30% or greater, particularly when both options have unusually high IVs.

An unusually high volatility skew often means that the front-month options are being used for wild speculation in the underlying stock due to some impending event that could dramatically alter the stock price.

If the IV skew is 50% or greater, the danger here for a calendar spread is twofold:

  1. It may instantaneously move the stock price out of the profitability range of the calendar spread.
  2. Even if the stock price remains unchanged, all the volatility will quickly collapse back to more normal levels after the event has passed. This is called a volatility crush.

A volatility crush can crush the price of the long option to a fraction of its original value, destroying the potential profit in the trade.

IV skew = (IV front-month – IV back-month) / IV back-month