*NOTE: To help with this trade, we’ve also created a signal for it that can be accessed by clicking here
Every time the market panics, the options market shows the same pattern:
Short-term implied volatility (1-month) spikes
Longer-term implied volatility (2-month) barely moves
This creates a volatility inversion meaning short term IV overreacts compared to long-dated IV.
The options market is basically telling you: “The next 30 days will be volatile, but after that…everything goes back to normal.”
And historically, when this inversion becomes extreme, the market is almost always wrong.
And when the volatility curve is wrong, it creates one of the most reliable profit making opportunities.
The Trade: Long Forward Volatility
To exploit the mispricing, we trade two positions on the same stock:
1. Buy the 2-month ATM straddle
(because longer-term IV is underpriced relative to the curve)
2. Sell the 1-month ATM straddle
(because short-term IV is overpriced due to panic)
This creates a forward volatility position:
It’s delta-neutral at entry.
It’s not a direction bet.
It’s a relative value arbitrage between two maturities.
And it’s one of the few places where options markets consistently misprice risk.
Yes, it’s a debit trade
Buying the 2-month straddle costs more than selling the 1-month.
So the position is a net debit, and your maximum loss is that debit.
But the entire point is not the credit or debit; it’s the relationship.
You’re not selling premium.
You’re buying mispricing.
What’s Great About This Strategy
✔ Defined risk (your max loss is the net debit)
✔ Delta-neutral
✔ No directional bias
✔ Not exposed to volatility crashes or gamma squeezes
✔ Negative beta (actually helps in selloffs)
✔ Weak correlation to almost every asset class
✔ No reliance on forecasting the market
✔ Pure mispricing, not speculation
Why Retail Traders Never Use This Strategy
Because:
It’s not a credit spread
It’s not directional
It’s not sexy
It requires understanding term structure
It requires trading two expirations at once
It isn’t marketed on YouTube or TikTok
But for sophisticated volatility funds, this is exactly the kind of anomaly worth harvesting.
At CI Volatility
We understand most investors struggle because they chase direction.
Mispricing is far more reliable than prediction.
This strategy doesn’t require you to be right about the market.
It only requires the market to behave like it always has:
short-term panic,
long-term calm,
and a curve that always returns to equilibrium.