TSLA Implied Vols

Lets say you hold the view that TSLA longer dated implied volatility is overpriced. Specifically you think the 6month/12month forward vols are 15 vegas too high - currently the 6m12m forward vol is trading at 62% and you think its worth 47%.

The first thing that comes to mind might be to initiate a short strangle position. Although this trade does express a short vega view, it also comes with a view on realized vols. This can be understood by looking at our theta position on a 6 month short straddle. The straddle is long 1k theta

Short Straddle

Since the term structure is pretty flat for TSLA we will likely get a “clean” short vol exposure by selling a gamma flat calendar spread. Gamma flat meaning our exposure to gamma at inception is 0

Volatility Cone

Gamma Flat Short Calendar

With this new position we are short vega even after adjusting for square root changes in the term structure. And since the term strucutre is currently flat, we are not paying a bunch of theta. Usually in equities when vol is high, the term structure is in backwardation and the front month options will cost you quite a bit of theta to buy.

To see how this trade will play out if our view on forward vol is correct, I have adjusted the term structure for a square root move down to our “fair” value. This means the front month options have been adjusted down 16% while our back month options have been adjusted down only 14%