AppliedMultiple choice
Forward volatility across the term structure · Part 2 of 3
On one stock, one-month implied volatility is 30% and three-month implied volatility is 24%. Treat the months as equal-length and ignore rates.
You think volatility from month one to month three will be much higher than the curve implies. Which trade expresses that view?
- ABuy three-month volatility and sell one-month volatility
- BSell three-month volatility and buy one-month volatility
- CBuy both expiries in equal vega, since the forward is too low
- DSell one-month volatility alone, because it is the expensive expiry
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