Skip to content
GetProfitable
Search
Dictionary

Forward volatility

The volatility implied for a future window between two expirations, backed out of the two quoted implied volatilities.

If the 30-day implies 25% and the 60-day implies 27%, the market is not saying the second month will also be 27%. It is saying the average of both months is 27%, which means the second 30-day window alone must be implying roughly 29%. That number is the forward volatility.

This is the fair comparison for a calendar-spread. You are never buying back-month volatility outright; you are buying the forward window, and the question is whether that window is cheap. Earnings dates falling in one window and not the other are the usual explanation for a strange-looking forward.

Example: XYZ 30-day at 25%, 60-day at 27%. Forward volatility for days 31 to 60 is about 28.9%. If XYZ reports earnings in that window, 28.9% may be cheap; if it reports in the first window, it is expensive.

Related: volatility-term-structure, calendar-spread, double-calendar, atm-volatility

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Bid-ask spread in an order bookSell orders stacked above buy orders with a gap between the best of each.SELLERS (asks)50.0690050.051,40050.0460050.011,10050.002,30049.99800spread = 0.03BUYERS (bids)
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.

Educational only, not advice. Spotted an error? Post in Site Feedback.