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