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Vertical spread

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Vertical spread
Any Option strategy that relies on the difference in Premium between two options on the same Underlying with the same maturity, but different strike prices. Thus put spreads and call spreads would both be vertical spreads. Volatility A measure of the variability (but not the direction) of the price of the Underlying instrument. It is defined as the annualised standard deviation of the natural log of the ratio of two successive prices. Historical volatility is a measure of the standard deviation of the Underlying instrument over a past period. Implied volatility is the Volatility implied in the price of an Option. All things being equal, higher Volatility Will lead to higher Vanilla option prices. In traditional Black-Scholes models, Volatility is assumed to be constant over the life of an Option. Since traders mainly trade Volatility, this is clearly unrealistic. New techniques have been developed to cope with Volatility’s variability. The best known are Stochastic volatility, Arch and Garch.
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