33 lines
1.8 KiB
Plaintext
33 lines
1.8 KiB
Plaintext
Chapter 37: How VolatHity Afleds Popular Strategies 769
|
||
volatility decreases. Again, these statements may seem contrary to what one would
|
||
expect from a bullish call position.
|
||
Of course, it's highly unlikely that implied volatility would change much in the
|
||
course of just one day while the stock price remained unchanged. So, to get a bet
|
||
ter handle on what to expect, one really to needs to look at what might happen at
|
||
some future time (say a couple of weeks hence) at various stock prices. The graph
|
||
in Figure 37-3 begins the investigation of these more complex scenarios.
|
||
The profit curve shown in Figure 37-3 makes certain assumptions: (1) The bull
|
||
spread assumes the details in Assumption Set 1, above; (2) the spread was bought
|
||
with an implied volatility of 20% and remained at that level when the profit picture
|
||
above was drawn; and (3) 30 days have passed since the spread was bought. Under
|
||
these assumptions, the profit graph shows that the bull spread conforms quite well to
|
||
what one would expect; that is, the shape of this curve is pretty much like that of a
|
||
bull spread at expiration, although if you look closely you'll see that it doesn't widen
|
||
out to nearly its maximum gain or loss potential until the stock is well above llO or
|
||
below 90 the strike prices used in the spread.
|
||
Now observe what happens if one keeps all the other assumptions the same,
|
||
except one. In this case, assume implied volatility was 80% at purchase and remains
|
||
at 80% one month later. The comparison is shown in Figure 37-4. The 80% curve is
|
||
overlaid on top of the 20% curve shown earlier. The contrast is quite startling.
|
||
Instead of looking like a bull spread, the profit curve that uses 80% implied volatili-
|
||
FIGURE 37-3.
|
||
Bull spread profit picture in 30 days, at 20% IV.
|
||
1000
|
||
500
|
||
<J)
|
||
<J)
|
||
0 0 ...J
|
||
?i:: 70 80 90 100 110 120 130 140
|
||
e a.
|
||
"' -500
|
||
Stock Price |