How to Calculate the Volatility of the Spread in Options Trading(4)

We know the spread is worth $1.20 at 36 volatility with a vega of .03.


So, we can assume that the spread trading at $1.00 must be trading at a volatility lower than 36.


To find out how much lower we first take the difference between the two spread values which is $.20 ($1.20 at 36 volatility minus $1.00 at ? volatility).


Then we divide the $.20 by the spread's vega of .03 and we get 6.667 volatility ticks.


We then subtract 6.667 volatility ticks from 36 volatility and we get 29.33 volatility for the spread trading at $1.00.


We can also determine the volatility of the spread as the spread's price changes. Let's fix the spread price at $1.30.


To calculate this, we must first take the value of the spread ($1.20 at 36 volatility) and find the dollar difference between it and the new price of the spread ($1.30).


The difference is $.10.


This dollar difference must now be divided by the vega of the spread.


The $.10 difference divided by the .03 vega gives you a value of 3.33 volatility ticks.


Then add the 3.33 ticks to the 36 volatility and you get 39.33 as the volatility for the spread trading at $1.30.