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Directional Spreads A trader would put on a Directional Spread when he is focusing on the underlying directional price movement (up or down). For this trader, the volatility in the market is of secondary importance, he rather wants to harness the bullish or bearish movement he foresees happening. If he goes into the position with a bullish sentiment, he wants his spread to remain bullish i.e. delta positive, regardless of any change whatsoever in market conditions. Conversely, if bearish, the trader wants his spread to remain bearish, or delta negative, "come hell or high water," e.g. if volatility, or interest rates, shift. Eg. Bull Call Spread, Bear Call Spread, Bull Put Spread, Bear Put Spread, Long Combo II. Volatility Spreads A Volatility Spread is a slightly more complicated beast, so please pay attention and try to follow me. The trader who puts on a volatility spread is chiefly interested in the degree of volatility of the underlying, and only secondarily in the directional movement of the underlying (Volatility, for our purposes, can be defined as the measurement of price fluctuation of the underlying, i.e. the "up and down-ness" of the underlying as it deviates from its average annual price). Now the Volatility Spreader may have a bullish or bearish perspective on the market, but unlike the Directional Spreader, if he doesn't factor in volatility, the intended direction of the spread could be reversed. First, volatility spreads are delta neutral, that is, the total deltas of the long position equal the total number of deltas of the short position, i.e. long and short deltas cancel each other out.Second, volatility spreads are sensitive to a number of factors, including the price of the underlying, time until expiration, volatility, and finally, interest rates and dividends . Eg. Straddle, Strange, Butterfly, Condor NOTE ON BUTTERFLY SPREAD: The delta of a long butterfly is mildly interesting because the delta is positive when the stock price is below the middle strike of the butterfly, neutral when the stock price is at the middle strike, and negative when it is above the middle strike. The intuition behind this is that the butterfly maximizes its value when the price of the stock is at the middle strike. Therefore, if the price of the stock is below the middle strike, it has to rise for the butterfly to make money ± hence the positive deltas. If the price of the stock is above the middle strike, it has to fall for the butterfly to make money ± hence the negative deltas. What's causing the delta to flip from positive to neutra l to negative? Your old friend, Captain Gamma. The gamma of a long butterfly runs from positive to negative. At the outer strikes of the butterfly, gamma is positive, indicating that the butterfly would manufacture positive deltas if the stock price rises, and negative deltas if the stock price falls.

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