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  • For a single future contract, I can calc the expected daily move (or rent) by using the following formula:

          Rent = [Future Price * Implied Volatility / SQRT (252)]
    

I am looking for doing the same thing for the daily expected move of a spread between two futures contract (a spread can be negative which makes the exercise harder)

Input I have are:

Future 1 Price = 66.50 ; Future 2 = 67.00

Implied Future 1 = 0.23 ; Implied Future 2 = 0.22

Correlation Future 1/Future 2 = 0.9850

Thank you for your help.


I am looking for calculating the expected move (rent) of the the spread b/w the two Fut (using the IV of the spread b/w the two Fut). Thank you for your help.

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First calculate Rent1 and Rent2 for the two futures. Then the expected daily move of the spread between the futures is

Sqrt( Rent1^2 + Rent2^2 -2Rent1Rent2Rho)

Where Rho= the correlation between daily moves ifvyhdvteonfurures

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  1. For the daily move you should take the square root of a single day: $$\text{Rent} = \text{Future Price}\times \text{Implied Volatility }\times \sqrt{\frac{1}{252}}$$

  2. $$\text{Spread} = \text{Fut1IV} - \text{Fut2IV} $$

Regarding your question, are you wanting to calculate the spread between the two Fut IV or the IV of the spread b/w the two Fut?

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  • $\begingroup$ I am looking for calculating the expected move (rent) of the the spread b/w the two Fut (using the IV of the spread b/w the two Fut). Thank you for your help. $\endgroup$ – Nick Sep 22 '16 at 7:16
  • $\begingroup$ Any idea how to achieve that? Thank you. $\endgroup$ – Nick Sep 23 '16 at 8:21

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