Cbapter 37: How Volatility Affects Popular Strategies 771 
high implied volatility situations, the bull spread won't expand out to its maximum 
price until expiration draws nigh. That can be frustrating and disappointing. 
Often, the bull spread is established because the option trader feels the options 
are "too expensive" and thus the spread strategy is a way to cut down on the total 
debit invested. However, the ultimate penalty paid is great. Consider the fact that, 
if the stock rose from 100 to 130 in 30 days, any reasonable four-month call pur­
chase (i.e., with a strike initially near the current stock price) would make a nice 
profit, while the bull spread barely ekes out a 5-point gain. To wit, the graph in 
Figure 37-5 compares the purchase of the at-the-money call with a striking price of 
100 and the 90-110 call bull spread, both having implied volatility of 80%. Quite 
clearly, the call purchase dominates to a great extent on an upward move. Of course, 
the call purchase does worse on the downside, but since these are bullish strategies, 
one would have to assume that the trader had a positive outlook for the stock when 
the position was established. Hence, what happens on the downside is not primary 
in his thinking. 
The bull spread and the call purchase have opposite position vegas, too. That is, 
a rise in implied volatility will help the call purchase but will harm the bull spread 
( and vice versa). Thus, the call purchase and the bull spread are not very similar posi­
tions at all. 
If one wants to use the bull spread to effectively reduce the cost of buying an 
expensive at-the-money option, then at least make sure the striking prices are quite 
FIGURE 37-5. 
Call buy versus bull spread in 30 days; IV = 80%. 
Cl) 
~ 
2500 
2000 
1500 
1000 
e 500 
Cl. 
-500 
-1000 
Outright Call Buy 
Bull Spread 
---
140 
Stock