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