Hello, looking at the volatility term structure of an index fund, suppose the following are the implied volatilities of at the money options with 1 week, 2 weeks, 3 weeks, and 4 weeks left until expiration: 10.4%, 10.5%, 10.1%, and 11%. What could be reasons for that third weeks options being underpriced in relation to the other weeks. Usually I see the implied volatility gradually increase the farther out you go, so it seems like they should all be slightly higher than the previous week. I am new to looking at this, so there might be an obvious answer I don't see. Thanks.
The term structure follows a pretty consistent increase in IV if you look at averages. But the vol curve is flexing throughout the day as demand/supply forces impact prices, so any point-in-time snapshot may show divergences. ET has some members who know this stuff better than anyone. Maverick74 or sle may be along to comment.
Hey Robert, no offense intended. Certain ET members pop into my mind for specific topics. You are a popular and valued member of ET and your posts are always appreciated.
I appreciate that, but I was just kidding . although this is completely within my wheelhouse as I was options market maker for 25 years , sle is more analytical than me. The fact is that his software could be off or there can be wide markets with a small offer in the 3rd week. We need to see what he is looking at to help
Ditto what Robert said. Also, you stated "index fund"! Seems your terminology may be adding to confusion. -- Which INDEX are you referencing? -- It is assumed, this is NOT a hypothetical question!
There is a difference in expected forward vol. If you tell us the ticker, we can see if there's an obvious explanation why.
Oh, that's good. Sometimes it's hard to know to take a post literally or kidding. In any case, I meant what I said. You're one of the "good guys" around here.