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+772 Part VI: Measuring and Trading Volatility 
+wide apart. That will allow for a reasonable amount of price appreciation in the bull 
+spread if the underlying rises in price. Also, one might want to consider establishing 
+the bull spread with striking prices that are both out-of-the-money. Then, if the stock 
+rallies strongly, a greater percentage gain can be had by the spreader. Still, though, 
+the facts described above cannot be overcome; they can only possibly be mitigated 
+by such actions. 
+A FAMILIAR SCENARIO? 
+Often, one may be deluded into thinking that the two positions are more similar than 
+they are. For example, one does some sort of analysis - it does not matter if it's fun­
+damental or technical - and comes to a conclusion that the stock ( or futures contract 
+or index) is ready for a bullish move. Furthermore, he wants to use options to imple­
+ment his strategy. But, upon inspecting the actual market prices, he finds that the 
+options seem rather expensive. So, he thinks, "Why not use a bull spread instead? It 
+costs less and it's bullish, too." 
+Fairly quickly, the underlying moves higher - a good prediction by the trader, 
+and a timely one as well. If the move is a violent one, especially in the futures mar­
+ket, implied volatility might increase as well. If you had bought calls, you'd be a happy 
+camper. But if you bought the bull spread, you are not only highly disappointed, but 
+you are now facing the prospect of having to hold the spread for several more weeks 
+(perhaps months) before your spread widens out to anything even approaching the 
+maximum profit potential. 
+Sound familiar? Every option trader has probably done himself in with this line 
+of thinking at one time or another. At least, now you know the reason why: High or 
+increasing implied volatility is not a friend of the bull spread, while it is a friendly ally 
+of the outright call purchase. Somewhat surprisingly, many option traders don't real­
+ize the difference between these two strategies, which they probably consider to be 
+somewhat similar in nature. 
+So, be careful when using bull spreads. If you really think a call option is too 
+expensive and want to reduce its cost, ti:y this strategy: Buy the call and simultane­
+ously sell a credit put spread (bull spread) using slightly out-of-the-money puts. This 
+strategy reduces the call's net cost and maintains upside potential (although it 
+increases downside risk, but at least it is still a fixed risk). 
+Example: With XYZ at 100, a trader is bullish and wants to buy the July 100 calls, 
+which expire in two months. However, upon inspection, he finds that they are trad­
+ing at 10 - an implied volatility of 59%. He knows that, historically, the implied 
+volatility of this stock's options range from approximately 40% to 60%, so these are