Properly Calculating Accurate Volatility Levels

Understanding and properly calculating accurate volatility levels is imperative for spread traders.


In order to get accurate volatility levels, you must first determine a base volatility for the two options involved in the spread.


Getting a base volatility must be done because different volatilities in different months can not, and do not, get weighted evenly mathematically.

Since they are weighted differently, you can not simply take the average of the two months and call that the volatility of the spread; it is more complicated than that.


The problem is related to calculating the spread's volatility with two options in different months.


Those different months are usually trading at different implied volatility assumptions.


You can not compare apples with oranges nor can you compare two options with different volatility assumptions