782 Part VI: Measuring and Trading Volatility 
volatility will be slightly harmful to the spread. However, since risk is limited in a 
backspread, such a decrease in implied volatility would not have catastrophic conse­
quences unless one had overcommitted his funds to one position. 
SUMMARY 
In general, one can always determine the exposure of his position to volatility by com­
puting the vega of this position. However, it is also useful for a strategist to have some 
general feeling for how implied volatility will affect his positions and strategies. Thus, 
this chapter was designed to point out the most common effects that changes .in 
implied volatility will have on the basic types of option strategies. Once one has a 
feeling for his exposure to volatility, he can then assess whether an adverse volatility 
movement is likely. For example, if an increase in implied volatility would be harm­
ful, and the strategist sees that current levels of implied volatility are quite low in 
comparison to historical norms, then perhaps he should remove or adjust the posi­
tion. 
Volatility and the price of the underlying are the two major components 
affecting profitability for most option positions. Time decay is only most pertinent 
as expiration approaches. Yet, many traders concentrate greatly on potential price 
movements of the underlying, often while ignoring what changes in implied volatil­
ity could do. That is a mistake, for the most knowledgeable option traders plan for 
volatility risk at all times. Understanding and handling that risk can have a positive 
effect on an option trader's profits.