Time / Diagonal Spreads For futures, commodities and options trading

Vega can also be used to calculate how much a specific futures, commodities and options trading price will change with a movement in implied volatility. You simply count how many volatility ticks implied volatility has moved.

Multiply that number times the vega and either add it (if volatility increased) to the option’s present value or subtract it (if volatility decreased) from the futures, commodities and options trading value to obtain the new futures, commodities and options trading value under the new volatility assumption. The calculation works on individual options and can be used to calculate the value of the time spread.

Now, let’s apply the concepts of vega to the Time Spread.

When you apply the vega concept to time spreads, you observe that as implied volatility increases, the value of the time spread increases. This is because the out-month option, with the higher vega will increase more than the closer month option with the lower vega. That widens or increases the spread.