hello i am looking at calendar spread options in the energy space
what are the current best practice thoughts ?
gut feel is that single factor model should be better than a correlation based model ..
implied volatility on actual spread
thanks
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- londonoiltrader
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Re: calendar spread options - single and multi factor models
Personally I would do the right thing and mark correlations.no thoughts ?
To be super-accurate you will Need to Keep a track of the early expiry aspects of the volatility surface, but if you ever do
Dispersion based strategies you will Need to the vega contributions of the CSOs to different vega maturities, so a correlation based Approach
is vital.
When you write "implied volatilty on actual spread" do you mean simply put the spread into Black76?
If so, I think that has a fairly obvious and fatal flaw.