Net volatility

Net volatility refers to the volatility implied by the price of an option spread trade involving two or more options. Essentially, it is the volatility at which the theoretical value of the spread trade matches the price quoted in the market.

Calendar Spread

The net volatility for a calendar spread can be estimated, to a first order approximation, by the formula:

$\sigma _{N}={\frac {\nu _{L}\sigma _{L}-\nu _{S}\sigma _{S}}{\nu _{L}-\nu _{S}}}\,$

where

$\sigma _{N}$ is the net volatility for the spread

$\sigma _{L}$ and $\nu _{L}$ are the implied volatility and vega for the long option

$\sigma _{S}$ and $\nu _{S}$ are the implied volatility and vega for the short option