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The seller of a time spread buys the nearer month option and sells the outer-month option in a one to one ratio. In order to profit from the sale of the time spread, the seller is looking basically for two things. First is a decrease in implied volatility. As volatility decreases, the out-month option (which…click to read more.

Like most trades, time spreads have a maximum loss for the buyer. As a buyer, you can only lose what you have spent. If you paid $1.00 for the spread then your maximum potential loss is that $1.00. If you bought the spread for $2.00, then $2.00 is the maximum potential loss. The buyer of…click to read more.

To be able to calculate the volatility of the spread, we must equalize the volatilities of the individual options. First, let’s move the June calls by moving June’s implied volatility down from 40 to 36, a decrease of four volatility ticks. Four volatility ticks multiplied by a vega of .05 per tick gives us a…click to read more.

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.

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