38 lines
1.6 KiB
Plaintext
38 lines
1.6 KiB
Plaintext
778 Part VI: Measuring and Trading Volatility
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FIGURE 37-9.
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Bear put spread profit in 30 days.
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1000 IV= 30%
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Assignment
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Risk
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Area
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(/)
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(/)
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0
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...J
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~ 0
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e 70 80 110 120 130 140
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a.
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ff7
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IV= 80%
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-1000
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'~
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Stock
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problem, though, since the spread would have widened to its maximum potential in
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that case and could just be removed when the risk of early assignment materialized.
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When implied volatility remains high, though, the spread doesn't widen out
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much, even when the stock drops a lot after 30 days. Since it is common for implied
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volatility to rise (even skyrocket) when the underlying drops quickly, the put bear
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spread probably won't widen out much. That may not be a psychologically pleasing
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strategy, because one won't make the level of profits that he had hoped to when the
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underlying fell quickly.
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Once again, it seems that the outright purchase of an option is probably superi
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or to a spread. In these cases, it is true with respect to puts, much as it was with call
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options. Spreading often unnecessarily complicates a trader's outlook.
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CALENDAR SPREADS
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In the earlier chapter on calendar spreads, it was mentioned that an increase in
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implied volatility will cause a calendar spread to widen out. Both options will become
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more expensive, of course, since the increase in implied volatility affects both of
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them, but the absolute price change will be greatest in the long-term option.
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Therefore, the calendar spread will widen. This may seem somewhat counterintu
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itive, especially where highly volatile stocks are concerned, so some examples may
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prove useful. |