When to Exit the Forward Volatility Strategy?

Quant Trading Strategies & Ideas
1

Hi, I am learning Options Trading Strategies in Python(Intermediate)  Section 9.4. As for my understanding on the Python code provided, sharing with us how to generate the trading signal and I think that's the time we could take action. How may I know when to exit the forward volatility strategy?

 

2

Hi Iris,



In the forward volatility strategy, we are continuously in either a long or short position based on the difference in volatility between near-month and far-month contract. 



signal = 1 is generated when forward volatility is lesser than near-month volatility. When this condition is reversed (signal = -1), we close the existing positions and take the exact opposite trades. 



So in a way, we exit the long position on the spread when forward volatility is more than near-month volatility. Also, at the same time, we open a short position on the spread. 



Hope this helps!



Thanks,

Akshay

 

3

Got you, your explaination is very clear. Thanks, Akshay!