776 
FIGURE 37-8. 
Put credit (bull) spread profit in 30 days. 
1000 
500 
- 1000 _ _,±8± 
Assignment Risk Area 
IV=30% 
Stock 
Part VI: Measuring and Trading Volatility 
-~ 
IV= 30% 
130 140 
First, one can observe that a bull put spread does not widen out to anywhere 
near its maximum potential if implied volatility increases. The same thing was seen 
with the call bull spread in the previous section. But a put bull spreader is caught in 
another trap: If implied volatility falls and the stock falls too, the risk of early assign­
ment materializes quicky. Note the shaded area at the lower left of the graph, extend­
ing from a price of about 94 on down. After thirty days (so there would be three 
months life remaining at that point in time), if implied volatility is 30%, the 110 put 
(the short put) would be trading at parity for stock prices of 94 and below. Thus, it 
would be at risk of early assignment. If implied volatility were even lower, the puts 
would be at parity for much higher stock prices. 
Now, in and of itself, early assignment on an equity or futures put spread is not 
necessarily a terrible thing. There will be a request for additional margin (because 
the stock has to be paid for or the futures contract margined), but the risk is still the 
same in dollar terms. Of course, the request for extra margin could be backbreaking 
for a stock trader if he can't afford to fully pay for the stock, and the early assignment 
would probably incur additional commission costs, too. However, with cash-based 
index options there is a more serious increase in risk after an early assignment, 
because one is left with only the long side of the spread. If that option happens to 
have substantial value, then there is considerable risk if the underlying should quick­
ly move higher. In fact, by the time one unwinds the spread, he might actually end 
up losing more than his original limited risk amount - all due to the early assignment. 
(This could happen if the underlying first plunges in price, placing both options