Chapter 37: How Volatility Affects Popular Strategies 777 
deeply in-the-money, after which one gets assigned on the short put option, followed 
by the underlying then dramatically rising in price.) 
The lesson to be learned is this: If one is considering using bull spreads in which 
at least one of the options is at- or in-the-rrwney, then a call bull spread is a superior 
choice over a put bull spread. Early assignment is not really a consideration for most 
call spreads. 
In both cases, however, a more serious problem exists, and that is that the 
spread does not widen out much even when the stock makes a nice bullish move. 
Thus, once again it is actually better to buy a call option in most cases than to use the 
bull spread, because profits are larger and an increase in implied volatility is a favor­
able thing for an outright call buyer. 
Note that these effects are similar, but much less pronounced, for out-of-the­
money put credit spreads. Still, it should be noted that an increase in implied volatil­
ity will harm an out-of-the-money put credit spread, too. Hence, if the underlying 
goes into a rapid fall (crash, plunge), then implied volatility usually increases quickly 
and dramatically. So an out-of-the-money credit spreader is hit with the double 
whammy of expanding implied volatility and the fact that the underlying is fast 
approaching the strike price of his options, . thereby expanding the price of the 
spread. 
PUT BEAR SPREADS 
What about the put spread in a bearish situation? In a vertical put spread one buys 
the put with the higher strike and sells the put with the lower strike to construct a 
simple put bear spread. Actually, a sudden increase in implied volatility is of help to 
the bear put spread. That is, the spread will widen out slightly. To verify this, look at 
Table 37-8 again, only now imagine that one is buying the spread for a debit. Note 
that the smallest debit is at the lower implied volatility- 9.15 debit with IV at 30%. 
If implied volatility were to instantaneously jump to 80%, the spread would widen 
out to 11.33 debit. A very quick profit could be had. So there's a difference right away 
between a debit call bull spread (which loses money when implied volatility sudden­
ly increases) and a debit put bear spread. 
Unfortunately, the other major drawback - that the spread doesn't widen out 
much if the underlying makes a favorable move - is still true. Figure 37-9 shows a 
bear put spread, 30 days hence, for two different implied volatilities. Once again, the 
lower-volatility spread widens out more quickly, because both options tend to go to 
parity in that case. In fact, one can see on the graph that there is early assignment 
risk in the low-volatility case, below a price of about 77 on the stock. That is not a