842 
Initial situation: OEX: 580 
Option 
June 590 call 
June 600 call 
A neutral spread would be: 
Buy 2 June 600 calls 
Sell I June 590 call 
Implied Volatility 
15% 
14% 
since the deltas are in the ratio of 2-to-l. 
Part VI: Measuring and Trading Volatility 
Delta 
0.40 
0.20 
Now, suppose that OEX rises to 600 at a later date, but well before expiration. 
This is not a particularly attractive price for this position. Recall that, at expiration, a 
backspread has its worst result at the striking price of the purchased options. Even 
prior to expiration, one would not expect to have a profit with the index right at 600. 
However, the statistical advantage that the strategist had to begin with might be 
able to help him out. The present situation would probably look like this: 
Option 
June 590 call 
June 600 call 
Implied Volatility 
17% 
16% 
The June 600 call is now the at-the-money call, since OEX has risen to 600. As 
such, its implied volatility will be 16% ( or whatever the "average" volatility is for OEX 
at that time - the assumption is made that it is still 16% ). The June 590 call has a 
slightly higher volatility (17%) because volatility skewing is still present. 
Thus, the options that are long in this spread have had their implied volatility 
increase; that is a benefit. Of course, the options that are short had theirs increase as 
well, but the overall spread should benefit for two reasons: 
1. Twice as many options are owned as were sold. 
2. The effect of increased volatility is greatest on the at-the-money option; the in­
the-money will be affected to a lesser degree. 
All index options exhibit this volatility skewing. Volatility skewing exists in other 
markets as well. The other markets where volatility skewing is prevalent are usually