ADVANCED OPTION STRATEGIES

ADVANCED OPTION STRATEGIES

VOLATILITY SPREAD

Ø  Volatility spread is a volatility based strategy.

Ø  Volatility Spread is a Delta neutral strategy.

Ø   In Volatility spread, we buy an option of X strike and sell an option of Y strike of same underlying.

Ø  It reduces volatility risk significantly.

Ø  In Volatility Spread we buy call with higher volatility and sell call of lower volatility. At the same time we keep delta neutral using future.

TYPE	SPOT	STRIKE	Quantity	VOL	Days To Expiry	Delta	Pos. Delta	Price
Call	5600	5500	1000	16 %	29	0.6635	663.5	157.71
Call	5600	5700	(1000)	14 %	29	(0.334)	(334.0)	(47.74)
						0.3295	329.5	109.97
Future	5600		(327)			(1)	(327)
						0.0004	0.4

In above example, the volatility of the long call is 16 % and volatility of short call is 14 %. Moreover for Volatility spread we keep delta neutral using future. Here the spread is 109.97. Now we will see the impact of volatility change. 

If volatility of long call changes to 17%.

TYPE	SPOT	STRIKE	Quantity	VOL	Days To Expiry	Delta	Pos. Delta	Price
Call	5600	5500	1000	17 %	29	0.6831	683.1	163.49
Call	5600	5700	(1000)	14 %	29	(0.334)	(334.0)	(47.74)
						0.3274	327.4	115.75

Here, if volatility of long call is increase by 1 % the spread has increased to 115.75 from 109.97.

TYPE	SPOT	STRIKE	Quantity	VOL	Days To Expiry	Delta	Pos. Delta	Price
Call	5600	5500	1000	16 %	29	0.6635	663.5	157.71
Call	5600	5700	(1000)	13 %	29	(0.3557)	(355.7)	(42.04)
						0.3274	327.4	115.67

Here, if volatility of short call is decrease by 1 % the spread has increased to 115.67 from 109.97.