May 14 - MCD un-contango'd

Earlier in the week, I entered into a time spread with MCD with front-month strikes of 130 (June) and 131 (May) and a back-month (July) strike of $130 with MCD trading around $131 and change.  The debit on the June/July 130 spread was $0.88.  Fast forward a few days and the trade worked perfectly--the underlying dropped a few dollars and IV increased.  The position should show a small profit, right?

Except for one thing--the options got un-contango'd.  The IV of the June options increased more than the IV of the July options.  The positive horizontal skew disappeared.

MCD implied volatility (1 month and 1 week)

This caused the spread (June/July 130) to shrink to $0.73!

Closing option quotes (last, change, bid ask)

Positive horizontal skew or increasing IV with longer dated options is typical with no pending major announcement such as earnings.  As you can see in the first chart above, MCD exhibited negative horizontal skew leading into earnings.  Skew flipped to positive once earnings were released.

Once I'm in the position, I generally don't care about the IV of the front-month options.  I typically hold them until 4-7 days until expiration, so the IVs don't really have a large influence on the value of the option (relative to the back-month).  But in this case, I'm tempted to add to my position given the un-contango'd (loss of skew) nature of the options.  One positive takeaway is that I've spread my short options between May and June expiry.  Hopefully, the June options will maintain their high IV until I roll the May shorts into June which I'll do some time next week.