Chapter 37: How Volatility Affects Popular Strategies 775 
Overall, the bullish spread position is an attractive alternative to an outright call 
purchase, especially when the call is overpriced. The spread does risk a greater 
amount of money if the underlying stock should collapse heavily. Still, if one is truly 
bullish, and if one employs a reasonably tight downside stop on his entire position, 
this spread can perform better than the outright purchase of an overpriced call. 
VERTICAL PUT SPREADS 
Also of interest is the effect that implied volatility has on put spreads. One of the 
more popular strategies involving puts is the sale of a credit spread - a bull spread 
with puts. Assume that a stock is selling at 100, and one is going to sell a put with a 
110 strike and buy a put with a 90 strike. That is a put credit (bull) spread. Also 
assume that the options have four months of life remaining. (See Table 37-8.) 
One would not rationally sell this credit spread if implied volatility were as low 
as 20%, because at that low level of volatility, the in-the-money December llO put is 
trading for 10 dollars - parity - and thus would immediately be at risk of early 
assignment. But one can see that an increase in implied volatility increases the value 
of the spread. Now, if one had sold this spread to begin with, he would thus be los­
ing money when implied volatility increased. This was proven with call bull spreads, 
too: They lose money when implied volatility increases. Conversely, of course, the 
put credit spread makes money when implied volatility decreases. 
What happens after thirty days have passed? Figure 37-8 shows just two cases 
- implied volatility at 30% and implied volatility at 80%. One can surmise that other 
levels of implied volatility between 30% and 80% would have profit graphs that lie 
between the two shown in Figure 37-8. 
TABLE 37-8 
Implied 
Volatility 
20% 
30% 
40% 
50% 
60% 
70% 
80% 
*Short option trading at parity 
90-110 
Put Bull Spread 
(Theoretical Value) 
9.15 er* 
9.70 er 
10. 12 er 
10.46 er 
10.78 er 
11.05 er 
11.33 er