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Understanding and properly calculating accurate volatility levels is imperative for spread traders. In order to get accurate volatility levels, you must first determine a base volatility for the two options involved in the spread. Getting a base volatility must be done because different volatilities in different months can not, and do not, get weighted evenly…click to read more.

The chart below shows a time spread and its reaction to increasing volatility. As you can see, each time implied volatility increases, the value of the time spreads increase. This increase would naturally favor the buyer. As you can see, if an investor bought the time spread at low volatility and within a few weeks…click to read more.

The chart below shows the vega values for calls and the corresponding puts. As you can see, these values match up in every instance. Vega can also be used to calculate how much a specific option’s price will change with a movement in implied volatility. You simply count how many volatility ticks implied volatility has…click to read more.

When purchasing a time spread, the investor should pay attention not only to the movement of the stock price but especially to the movement of volatility. Volatility plays a very large roll in the price of a time spread and, as we have stated, the time spread is an excellent way to take advantage of…click to read more.

The price of a time spread will fluctuate with movements in stock price. A time spread will be at its widest when the stock price and the strike price of the spread are identical (i.e. at-the-money). As the stock moves away from the strike in either direction, the value of the time spread will decrease.…click to read more.

Behavior of the Spread

Monday, November 19, 2007
Filed Under Intermediate Options Trading 

Time spreads can be a profitable investment strategy if you understand the concept of time decay. A time spread is designed to take advantage of the fact that an option’s decay curve is non-linear; that is, an option’s value does not decay evenly over time. As an option gets closer to expiration, its rate of…click to read more.

Time / Diagonal Spreads

Sunday, November 18, 2007
Filed Under Intermediate Options Trading 

Time Spreads Time Spreads, also known as Calendar Spreads, are an ideal way to take advantage of time decay and changes in implied volatility. The time spread strategy focuses on the movement of time and volatility more than on the movement of the stock. Therefore, this strategy is ideal for use when you anticipate either…click to read more.

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