InsidersTradesSigma
Instruments & Market Microstructure
The implied volatility differential embedded in a call spread position that reflects the market's expectation of price movement between the long call strike and short call strike, critical for assessing directional exposure and risk in insider-trading surveillance.
A call spread (long a call at a lower strike, short a call at a higher strike) is a capped-payoff directional bet. The embedded volatility is the implied-volatility differential between the two legs, which depends on the volatility smile across strikes. Selling the higher strike cuts the cost of the position, in exchange for capping the upside, so the trade expresses a bounded view rather than open-ended conviction.
The embedded volatility can be decomposed into vega (sensitivity to a shift in overall implied volatility) and convexity from the gamma of the two legs. Because the long and short legs sit at different points on the volatility smile, the net vega of a call spread is usually small: it is much more a directional trade than a volatility trade, which is the main thing to keep straight when pricing or hedging one.