770 Part VI: Measuring and Trading Volatility 
FIGURE 37-4. 
Bull spread profit picture in 30 days. 
1000 
500 
iv=80% 
(/) 
(/) 
0 
0 -' :;:, 
70 801 90 e 
~ 
a. 
fl'> 
-500 
130 140 
iv= 20% 
-1000 Stock 
ty is a rather flat thing, sloping only slightly upward - and exhibiting far less risk and 
reward potential than its lower implied volatility counterpart. This points out anoth­
er important fact: For volatile stocks, one cannot expect a 4-rrwnth bull spread to 
expand or contract much during the first rrwnth of life, even if the stock makes a sub­
stantial rrwve. Longer-term spreads have even less movement. 
As a corollary, note that if implied volatility shrinks while the stock rises, the 
profit outlook will improve. Graphically, using Figure 37-4, if one's profit picture 
moves from the 80% curve to the 20% curve on the right-hand side of the chart, that 
is a positive development. Of course, if the stock drops and the implied volatility 
drops too, then one's losses would be worse - witness the left-hand side of the graph 
in Figure 37-4. 
A graph could be drawn that would incorporate other implied volatilities, but 
that would be overkill. The profit graphs of the other spreads from Tables 37-6 or 
37-7 would lie between the two curves shown in Figure 37-4. 
If this discussion had looked at bull spreads as put credit spreads instead of call 
debit spreads, perhaps these conclusions would not have seemed so unusual. 
Experienced option traders already understand much of what has been shown here, 
but less experienced traders may find this information to be different from what they 
expected. 
Some general facts can be drawn about the bull spread strategy. Perhaps the 
most important one is that, if used on a volatile stock, you won't get much expansion 
in the spread even if the stock makes a nice move upward in your favor. In fact, for