How does volatility affect our choice of vertical spread? It is important to know how the various verticals react in differing volatility environments since knowledge can help provide a slight edge.
For example, both of these strategies are bearish, however they react differently to a move lower in the market.
|Strategy||P/L Impact After Price Decrease||P/L Impact After Volatility Increase|
|Short Call Spread||Positive||Negative|
|Long Put Spread||Positive||Positive|
More specifically, when we have low IV Rank we tend to choose debit spreads and when we have higher IV Rank we tend to choose credit spreads.
For more information, and the reasons why the spreads react the way they do in different volatility environments (hint: skew), watch the segment!
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