· GHAR:f ER :8'7 . . -
How Volatility Affects 
Popular Strategies 
The previous chapter addressed the calculation or interpretation of implied volatili­
ty, and how to relate it to historic volatility. Another, related topic that is important is 
how implied volatility affects a specific option strategy. Simplistically, one might think 
that the effect of a change in implied volatility on an option position would be a sim­
ple matter to discern; but in reality, most traders don't have a complete grasp of the 
ways that volatility affects option positions. In some cases, especially option spreads 
or more complex positions, one may not have an intuitive "picture" of how his posi­
tion is going to be affected by a change in implied volatility. In this chapter, we'll 
attempt a relatively thorough review of how implied volatility changes affect most of 
the popular option strategies. 
There are ways to use computer analysis to "draw" a picture of this volatiiity 
effect, of course, and that will be discussed momentarily. But an option strategist 
should have some idea of the general changes that a position will undergo if implied 
volatility changes. Before getting into the individual strategies, it is important that 
one understands some of the basics of the effect of volatility on an option's price. 
VEGA 
Technically speaking, the term that one uses to quantify the impact of volatility 
changes on the price of an option is called the vega of the option. In this chapter, the 
references will be to vega, but the emphasis here is on practicality, so the descriptions 
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