Hi WayneL,

I've a couple of questions on this most interesting concept. I have never seen anything like it before and it looks almost like a Bollinger band on volatility, if my interpretation of it is correct. The assumption here is that if IV approaches the maximum, then its value (based on historical Volatility) can be viewed as excessive, and one can therefore expect it to decrease over time and revert back to the mean. Therefore you would aim for strategies which are short Vega.

Vice Versa if IV approach the minimum, in which case, it can be expected to increase over time and also revert back to the mean and therefore aim for strategies that are long Vega.

1) Is my interpretation of what the cone offers correct ?

2) For the IV, would you recommend using the values from ATM, OTM or ITM options ? Also any preferences for using IVs from Calls or Puts ? I guess in theory, they should be all be the same (or roughly the same), but the skew can be quite pronounced at times.

3) Just looking at the cone shape itself almosts give the impression of an endorsement for a long calender spread, with the long call being bought at relatively stable IVs and the short calls available at a much larger range of IVs. Off course, this is not to say that the short term IVs are higher or lower than the longer term IVs, just that they are more volatile. Almost like a higher IV on an IV

I am curious as to whether you can look at the shape of the cone and deduce from that whether a calender spread is a worthwhile strategy for that particular stock, or have I entirely missed the boat??

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