37 lines
2.7 KiB
Plaintext
37 lines
2.7 KiB
Plaintext
Chapter 37: How Volatility Affects Popular Strategies 777
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deeply in-the-money, after which one gets assigned on the short put option, followed
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by the underlying then dramatically rising in price.)
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The lesson to be learned is this: If one is considering using bull spreads in which
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at least one of the options is at- or in-the-rrwney, then a call bull spread is a superior
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choice over a put bull spread. Early assignment is not really a consideration for most
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call spreads.
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In both cases, however, a more serious problem exists, and that is that the
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spread does not widen out much even when the stock makes a nice bullish move.
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Thus, once again it is actually better to buy a call option in most cases than to use the
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bull spread, because profits are larger and an increase in implied volatility is a favor
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able thing for an outright call buyer.
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Note that these effects are similar, but much less pronounced, for out-of-the
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money put credit spreads. Still, it should be noted that an increase in implied volatil
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ity will harm an out-of-the-money put credit spread, too. Hence, if the underlying
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goes into a rapid fall (crash, plunge), then implied volatility usually increases quickly
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and dramatically. So an out-of-the-money credit spreader is hit with the double
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whammy of expanding implied volatility and the fact that the underlying is fast
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approaching the strike price of his options, . thereby expanding the price of the
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spread.
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PUT BEAR SPREADS
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What about the put spread in a bearish situation? In a vertical put spread one buys
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the put with the higher strike and sells the put with the lower strike to construct a
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simple put bear spread. Actually, a sudden increase in implied volatility is of help to
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the bear put spread. That is, the spread will widen out slightly. To verify this, look at
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Table 37-8 again, only now imagine that one is buying the spread for a debit. Note
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that the smallest debit is at the lower implied volatility- 9.15 debit with IV at 30%.
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If implied volatility were to instantaneously jump to 80%, the spread would widen
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out to 11.33 debit. A very quick profit could be had. So there's a difference right away
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between a debit call bull spread (which loses money when implied volatility sudden
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ly increases) and a debit put bear spread.
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Unfortunately, the other major drawback - that the spread doesn't widen out
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much if the underlying makes a favorable move - is still true. Figure 37-9 shows a
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bear put spread, 30 days hence, for two different implied volatilities. Once again, the
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lower-volatility spread widens out more quickly, because both options tend to go to
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parity in that case. In fact, one can see on the graph that there is early assignment
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risk in the low-volatility case, below a price of about 77 on the stock. That is not a |