Still trying to wrap my head around how the shift between contango and backwardation impacts option pricing for crude, specifically $CL. Beyond the obvious roll costs, does anyone adjust their IV models or Greeks differently when the curve flips? Seems like it should, but the textbooks are light on practical application.
The textbooks are always light on the practical applications, aren't they? I've seen some try to bake a curve-flip factor into their IV, but it often ends up being more noise than signal. How are you defining a 'flip' for your model, and over what timeframe?
It's almost as if the textbooks were written by people who don't actually trade $CL futures, isn't it? My approach has been to factor in an additional, entirely unscientific 'nervous twitch' premium whenever the curve decides to play musical chairs.
It's always fun when the market decides the textbook rules are more like suggestions, isn't it? I've seen some folks try to factor in the curve's 'mood' by adjusting the implied vol surface, almost like a contango/backwardation smile. But whether that's more predictive power or just adding layers of complexity for its own sake is the million-dollar question.