Options Seller Risk/Reward (3)

Increases in implied volatility are also detrimental to the potential profits of the time- spread seller.


When implied volatility increases, the out month option (which the seller is short) increases in value faster than the near month option (which the seller is long) due to the out month option's higher vega.


This creates an expansion in the spread and increases its value resulting in a negative for the spread seller.


The seller, in theory, has an unlimited loss potential.


For the seller, the maximum loss potential is not so much determined by the stock price movement but by the movement in implied volatility.


As the seller, you will be long the front month call and short the out- month call.


As we know, the out month call will be more sensitive to movements in implied volatility due to a higher vega or volatility sensitivity component.


If implied volatility increases then the seller's short, out month option will increase more in value than will the seller's long, front month option.


This will cause the spread to widen or increase in value; that is negative for the seller.