Credit Spread Question Please Help!!!

[bezzer11]

I have been grappling with this question and cannot seen to find and answer.

I don't understand how selling credit spreads takes advantage of high volatility.

Lets say you semi-bullish on a stock. So you are selling a put with a strike near the money and buying a put with a strike further out of the money. Yes, you are receiving more in premium from the option you sell but you are also paying more in premium for the option you buy (given that ivol for both is similar), so the benefit is nullified is it not?

If anyone can provide any insight thank you.

-DDP

 

[Martinghoul]

You're going to be net short vol, albeit marginally. In general, it doesn't make a lot of sense to do this to take advantage of high volatility.

 

[bezzer11]

You're going to be net short vol, albeit marginally. In general, it doesn't make a lot of sense to do this to take advantage of high volatility.

Are you saying buying a bull put spread and a bull call spread really shouldnt depend on where implied vol is?

I think the literature is saying that because implied vol is mean reverting, when it is high, selling credit spreads will be more profitable because we can increase out POP by selling credit spreads further out of the money and still collect a hefty premium; as opposed to paying a lot for a bull call spread when implied vol is too high.

Im starting to change my opinion I think selling credit spreads does take advantage of high implied vol.

 

[Martinghoul]

Are you saying buying a bull put spread and a bull call spread really shouldnt depend on where implied vol is?

I think the literature is saying that because implied vol is mean reverting, when it is high, selling credit spreads will be more profitable because we can increase out POP by selling credit spreads further out of the money and still collect a hefty premium; as opposed to paying a lot for a bull call spread when implied vol is too high.

Im starting to change my opinion I think selling credit spreads does take advantage of high implied vol.

Firstly, no, I am not saying that call/put spread prices are independent of IV. Like I said, if you sell spreads, you will be short vol, so yes, marginally, you'll be "taking advantage" of high IV. However, as I also mentioned, it doesn't make a lot of sense to do this.

 

[bezzer11]

Firstly, no, I am not saying that call/put spread prices are independent of IV. Like I said, if you sell spreads, you will be short vol, so yes, marginally, you'll be "taking advantage" of high IV. However, as I also mentioned, it doesn't make a lot of sense to do this.

It helps to look at Vega and I understand a lot better now. You're right, I am marginally short vol on all my credit spreads. Thanks for taking the time Martinghoul.