How to Calculate the Volatility of the Spread in Options Trading(3)

Since we now have an equal base volatility, we can calculate the spread's vega by taking the difference between the two individual option's vegas.


In the example above, the spread's vega is .03 (.08 - .05).


The vega of the spread is calculated by finding the difference between the vega's of the two individual options because in the time spread, you will be long one option and short the other option.


As volatility moves one tick, you will gain the vega value of one of the options while simultaneously losing the vega value of the other.


Thus the spread's vega must be equal to the difference between the two options vega's.


So, our spread is worth $1.20 at 36 volatility with a .03 vega or $1.32 at 40 volatility with a .03 vega.


Going back to our original spread value of $1.00 with a vega of .03, we can now calculate the volatility of that spread.