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Ok, obviously I am buying lower strike put and selling higher strike put. What is the recommended volatility and greeks to consider in my trade?

Volatility:

  1. Average volatility between both legs?
  2. Long volatility minus short volatility

Delta/gamma/theta/vega:

  1. Average Delta/gamma/theta/vega between both legs?
  2. Long Delta/gamma/theta/vega minus short Delta/gamma/theta/vega?

I think option one for volatility and option two for greeks. Any thoughts?

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1 Answer

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The delta, gamma, theta and vega exposure is just the sum of the individual positions, thus you sum up the greeks of your two puts, simple as that.

Regarding implied volatility you cannot just average implied vols and say this is the implied vol of my structure (multi asset position). You can assign your own volatility expectations and compare that with its historical realized volatility or compare with the expectation other market participants have (many spreads are listed, this one I dont think so), but you can't in a linear fashion combine implied volatility figures. Why would you want the implied volatility of the structure anyway?

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I need this to be able to screen bull put spreads by single volatility parameter. Will I just use which ever volatility of both legs is the highest? There seems to be no 100% correct solution here but what is the most correct? Average or highest of two or volatility of long or short leg? – Vtech Feb 1 at 10:13
I would then not screen by implied vol but rather vega exposure. IVols are obviously directly related to the option price and if you take an average both both puts or the one of the long or short leg you will potentially screen for suboptimal spreads, especially when other spreads are striked wider or narrower. – Matt Wolf Feb 1 at 10:50
Thank you Freddy. My Bull Put Spreads are with narrow strikes. (one after another). It seems like short term solution: Highest volatility value out of both strikes should be used but in long term I should probably include a screener for the lower volatility leg too. – Vtech Feb 1 at 16:00
No worries, at least for all the Greeks there should be no ambiguity. – Matt Wolf Feb 1 at 16:47

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