Interpretation
In the example above, going short a May 100 call and long a Sep 100 call results in a synthetic forward option - i.e. an option struck at 100 that spans the period from May to September expirations. To see this, consider that the two options essentially offset each other from today until the expiration of the short May option.
Thus, the net volatility calculated above is, in fact, the implied volatility of this synthetic forward option. While it may seem counter-intuitive that one can create a synthetic option whose implied volatility is lower than the implied volatilities of its components, consider that the first implied volatility, 18.1%, corresponds to the period from today to May expiration, while the second implied volatility, 14.3% corresponds to the period from today to September expiration. Therefore, the implied volatility for the period May to September must be less than 14.3% to compensate for the higher implied volatility during the period to May.
In practice, one sees this type of situation often when the short leg is being bid up for a specific reason. For instance, the near option may include an upcoming event, such as an earnings announcement, that will, in all probability, cause the underlier price to move. After the event has passed, the market may expect the underlier to be relatively stable which results in a lower implied volatility for the subsequent period.
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