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+Chapter 37: How Volatility Affects Popular Strategies 779 
+Example: Suppose that XYZ is trading at 100, and one is interested in a calendar 
+spread in which an August (5-month) call is bought and a May (2-month) call is sold. 
+For the purpose of this example, it will be assumed that these are both at-the-money 
+options. First, the vegas of the two options will be examined, assuming that implied 
+volatility is 40%: 
+Stock: 100 
+Implied Volatility: 
+40% Option 
+Sell May 100 call 
+Buy August 1 00 call 
+Theoretical Price 
+6.91 
+11.22 
+Vega 
+0.162 
+0.251 
+In theory, this spread should be worth 4.31 - the difference in the theoretical 
+values. Perhaps more important, it has volatility exposure of 0.089 - the difference 
+between the vega of the long call and that of the short call. Since vega is positive, this 
+means that an increase in implied volatility will be beneficial to the spread. In other 
+words, one can expect the spread to widen if implied volatility rises, and can expect 
+the spread to shrink if implied volatility declines. 
+The following table can also be constructed, showing the theoretical value of 
+the spread at various levels of implied volatility. This table makes the assumption that 
+very little time has passed ( only one week) before the implied volatility changes take 
+place. It also assumes that the stock is still at 100. 
+Stock Price: 100 
+One week ofter the spread hos been established: 
+Implied Volatility Theoretical Spread Value 
+20% 2.58 
+30% 3.52 
+40% 4.46 
+50% 5.40 
+60% 6.33 
+80% 8.16 
+100% 12.92 
+From the above data, it is quite obvious that implied volatility levels have a huge 
+effect on the value of a calendar spread. The actual initial contribution of time decay 
+is rather small in comparison. For example, note that if volatility remains unchanged 
+at 40%, then the spread will have widened only slightly - to 4.46 from 4.31 - after 
+the passage of one week's time. That is small in comparison to the changes dictated 
+by volatility expansion or contraction.