Chapter 37: How Volatility Affects Popular Strategies 767 
positively affect both the put and the call in a long straddle. Thus, if a straddle buyer 
is careful to buy straddles in situations in which implied volatility is "low," he can 
make money in one of two ways. Either (1) the underlying price makes a move great 
enough in magnitude to exceed the initial cost of the straddle, or (2) implied volatil­
ity increases quickly enough to overcome the deleterious effects of time decay. 
Conversely, a straddle seller risks just the opposite - potentially devastating loss­
es if implied volatility should increase dramatically. However, the straddle seller can 
register gains faster than just the rate of time decay would indicate if implied volatil­
ity decreases. Thus, it is very important when selling options - and this applies to cov­
ered options as well as to naked ones - to sell only when implied volatility is "high." 
A strangle is the same as a straddle, except that the call and put have different 
striking prices. Typically, the call strike price is higher than the put strike price. 
Naked option sellers often prefer selling strangles in which the options are well out­
of-the-money, so that there is less chance of them having any intrinsic value when 
they expire. Strangles behave much like straddles do with respect to changes in 
implied volatility. 
The concepts of straddle ownership will be discussed in much more detail in the 
following chapters. Moreover, the general concept of option buying versus option 
selling will receive a great deal of attention. 
CALL BULL SPREADS 
In this section, the bull spread strategy will be examined to see how it is affected by 
changes in implied volatility. Let's look at a call bull spread and see how implied 
volatility changes might affect the price of the spread if all else remains equal. Make 
the following assumptions: 
Assumption Set 1 : 
Stock Price: 1 00 
Time to Expiration: 4 months 
Position: long Call Struck at 90 
Short Call Struck at 110 
Ask yourself this simple question: If the stock remains unchanged at 100, and implied 
volatility increases dramatically, will the price of the 90-110 call bull spread grow or 
shrink? Answer before reading on. 
The truth is that, if implied volatility increases, the price of the spread will 
shrink. I would suspect that this comes as something of a surprise to a good number 
of readers. Table 37-6 contains some examples, generated from a Black-Scholes