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Flattened Volatility Term Structure

In “Long Gamma, Short Vega” the option strategy entailed getting long short term options and short longer term options.  One of the reasons this trade looked attractive was because the term structure of volatility was steeply upward sloping.  This means that options with a short time to maturity were trading at relatively low implied volatility compared to options at with a longer time to maturity.  Since volatility has spiked faster on the short dated side of the curve with the last two weeks of the market correction, the term structure has flattened significantly.

The gap between 1 month SPX options and 24 month options is less than 1 volatility point

If you placed a trade in which you were long short dated options and short long dated options with the expectation that the gap between the two volatilities would narrow, now would be a good time to close out that trade.  In addition, shorter dated put options out of the money look like good candidates to short.

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