A two-month option has an implied vol of 60%, the corresponding 2-year option has an implied vol of 34%. You buy the short terms and sell the long terms. What is the inherent volatility of the total position (show a calculation).
a. higher than 60%
b. between 60% and 34%
c below 34%
I dont even know how to attack this question. Not even sure how this position is balanced, but lets say 1 long term versus 1 short term.
I do understand this position but not the question. If you're in this spread you want a high realized volatility (especially first two monhts) and a decreasing implied volatility. Your short leg has more gamma than vega, and your long leg vice versa.