45 lines
2.1 KiB
Plaintext
45 lines
2.1 KiB
Plaintext
Chapter 37: How Volatility Affects Popular Strategies 775
|
||
Overall, the bullish spread position is an attractive alternative to an outright call
|
||
purchase, especially when the call is overpriced. The spread does risk a greater
|
||
amount of money if the underlying stock should collapse heavily. Still, if one is truly
|
||
bullish, and if one employs a reasonably tight downside stop on his entire position,
|
||
this spread can perform better than the outright purchase of an overpriced call.
|
||
VERTICAL PUT SPREADS
|
||
Also of interest is the effect that implied volatility has on put spreads. One of the
|
||
more popular strategies involving puts is the sale of a credit spread - a bull spread
|
||
with puts. Assume that a stock is selling at 100, and one is going to sell a put with a
|
||
110 strike and buy a put with a 90 strike. That is a put credit (bull) spread. Also
|
||
assume that the options have four months of life remaining. (See Table 37-8.)
|
||
One would not rationally sell this credit spread if implied volatility were as low
|
||
as 20%, because at that low level of volatility, the in-the-money December llO put is
|
||
trading for 10 dollars - parity - and thus would immediately be at risk of early
|
||
assignment. But one can see that an increase in implied volatility increases the value
|
||
of the spread. Now, if one had sold this spread to begin with, he would thus be los
|
||
ing money when implied volatility increased. This was proven with call bull spreads,
|
||
too: They lose money when implied volatility increases. Conversely, of course, the
|
||
put credit spread makes money when implied volatility decreases.
|
||
What happens after thirty days have passed? Figure 37-8 shows just two cases
|
||
- implied volatility at 30% and implied volatility at 80%. One can surmise that other
|
||
levels of implied volatility between 30% and 80% would have profit graphs that lie
|
||
between the two shown in Figure 37-8.
|
||
TABLE 37-8
|
||
Implied
|
||
Volatility
|
||
20%
|
||
30%
|
||
40%
|
||
50%
|
||
60%
|
||
70%
|
||
80%
|
||
*Short option trading at parity
|
||
90-110
|
||
Put Bull Spread
|
||
(Theoretical Value)
|
||
9.15 er*
|
||
9.70 er
|
||
10. 12 er
|
||
10.46 er
|
||
10.78 er
|
||
11.05 er
|
||
11.33 er |