Chapter 39: Volatility Trading Techniques 
FIGURE 39-6. 
Volatility backspread neutral position. 
Underlying Price 
835 
in advance of the near-term expiration. It should not be allowed to deteriorate to the 
point of maximum loss. 
Modifications to the strategy can be considered. One is to sell even longer-term 
options and of course hedge them with the purchase of the near-term options. The 
longer-term the option is, the bigger its vega will be, so a decrease in implied volatil­
ity will cause the heftier-priced long-term option to decline more in price. This mod­
ification is somewhat tempered, though, by the fact that when options get really 
expensive, there is often a tendency for the near-term options to be skewed. That is, 
the near-term options will be trading with a much higher implied volatility than will 
the longer-term options. This is especially true for LEAPS options. For that reason, 
one should make sure that he is not entering into a situation in which the shorter­
term options could lose volatility while the longer-term ones more or less retain the 
same implied volatility, as LEAPS options often do. This concept of differing volatil­
ity between near- and long-term options was discussed in more detail in Chapter 36 
on the basics of volatility trading. As a sort of general rule, if one finds that the longer­
term option has a much lower implied volatility than the one you were going to buy, 
this strategy is not recommended. As a corollary, then, it is unlikely that this strate­
gy will work well with LEAPS options. 
One other thing that you should analyze when looking for this type of trade is 
whether it might be better to use the puts than the calls. For one thing, you can estab­
lish a position in which the heavy profitability is on the downside (as opposed to the 
upside, as in the XYZ example above). Then, of course, having considered that, it 
might actually behoove one to establish both the call spread and the put spread. If