Yeah. For example, one day of high volatility won't have a big impact on option IV for options with 365-days but will greatly affect the value of 1-day options... this is because the 365-day option needs sustained higher RV to have an impact because it reflects many days. Take the concept 1 step further, options with 3 days share an RV profile of 1 day options + a 2 day option... same with 365 days... it's really 1 day option RV profile + 364 day options RV profile... so on and so forth.
Last point: Long-dated options have high Vega but the IV sensitivity is low (again because we need sustained RV changes to affect LT option IV)
Short-dated options have low vega but the variance of IV is much much higher because it can swing drastically with big 1 day moves in the underlying
Nice article! Can you briefly explain why you'd expect the long dated option is an average of short dated option in vol space?
Yeah. For example, one day of high volatility won't have a big impact on option IV for options with 365-days but will greatly affect the value of 1-day options... this is because the 365-day option needs sustained higher RV to have an impact because it reflects many days. Take the concept 1 step further, options with 3 days share an RV profile of 1 day options + a 2 day option... same with 365 days... it's really 1 day option RV profile + 364 day options RV profile... so on and so forth.
Last point: Long-dated options have high Vega but the IV sensitivity is low (again because we need sustained RV changes to affect LT option IV)
Short-dated options have low vega but the variance of IV is much much higher because it can swing drastically with big 1 day moves in the underlying