How to Calculate the Volatility of the Spread in Options Trading

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 value of $.20.



Next we subtract $.20 from the June 70 option's present value of $2.00 and we get a value of $1.80 at 36 volatility.


Now the two options are valued at an equal volatility basis.Looking at this first adjustment where we moved the June 70's volatility down to 36 from 40, we have a value of $1.80 at 36 volatility.


The August 40 call has a value of $3.00 at 36 volatility.


So the spread will be worth $1.20 at 36 volatility.