Chapter 37: How Volatility Affects Popular Strategies 781 
call bull spreads and some naked call options. For example, a call ratio spread might 
consist of buying an XYZ July 100 call and selling two XYZ July 120 calls. If one were 
to break it down into its components, this spread is really long one XYZ July 100-120 
call bull spread, plus an additional naked July 120 call. 
We already know that an increase in implied volatility is very detrimental to a 
naked call option. In addition, it was shown earlier than an increase in implied volatil­
ity actually harms the value of an at-the-money call bull spread. So, for a ratio call 
spread, both components are harmed by an increase in implied volatility. Conversely, 
a decrease in implied volatility would be beneficial to a ratio spread, but where naked 
options are concerned, one should be more mindful of his risk than of this reward. 
It was also shown previously that a call bull spread does not widen out much if 
the underlying stock makes a quick upward move. The spread won't widen out to its 
maximum profit potential until expiration draws nigh or the stock is well above the 
upper strike in the spread. This scenario also does not bode well for the ratio call 
spread. Suppose that the underlying stock suddenly jumps upward and implied 
volatility increases at the same time. That combination is seen quite frequently, espe­
cially if the stock were previously "dull" or if there is some sort of active corporate 
(takeover) rumor. The call ratio spread will fare miserably under these conditions, 
because the increase in stock price certainly harms the naked call position and the 
bull spread is not widening out much to compensate for it. In addition, the increase 
in implied volatility is working against both components. 
The same sort of thing happens with put ratio spreads. They are really the com­
bination of a put bear spread plus some additional naked put options. If the under­
lying falls in price, while implied volatility increases - a very common occurrence in 
all markets then the put ratio spread will fare poorly. In fact, implied volatility 
sometimes explodes if the underlying falls very rapidly (crashes), so the ratio put 
spreader should clearly assess his risk in this light. 
In summary, a trader utilizing ratio spread strategies should clearly understand 
and attempt to analyze the risks of an increase in implied volatility. This includes not 
only assessing the vega risk of the spread, but also using a probability calculator with 
some inflated volatility estimates to see just what the chances are of the spread get­
ting into real trouble. 
BACKSPREADS 
A call backspread is merely the opposite of a call ratio spread. Thus, any of the earli­
er commentary about how an increase in implied volatility is detrimental to a ratio 
spread can be reversed when discussing the backspread. An increase in implied 
volatility will be beneficial to a backspread strategy, while a decrease in implied