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+746 Part VI: Measuring and Trading Volatility 
+the order of those with insider information might come into the pit to buy options, 
+but the market-makers may not sell them many, preferring to raise their offering 
+price rather than sell a large quantity. If this happens a few times in a row, the options 
+will have gotten very expensive as the floor broker raises his bid price repeatedly, but 
+only buys a few contracts each time. Meanwhile, the market-maker keeps raising his 
+offering price. 
+Eventually, the floor broker concludes that the options are too expensive to 
+bother with and walks away. Perhaps his client then buys stock. In any case, what has 
+happened is that the options have gotten very expensive as the bids and offers were 
+repeatedly raised, but not much option volume was actually traded because of the 
+illiquidity of the contracts. Hence the normal warning light associated with a sudden 
+increase in option volume would not be present. In this case, though, a volatility sell­
+er should still be careful, because he does not want to step in to sell calls right before 
+some major corporate news item is released. The clue here is that implied volatility 
+literally exploded in a short period of time (one day, or actually less time), and that 
+alone should be enough warning to a volatility seller. 
+The point that should be taken here is that when options suddenly become very 
+expensive, especially if accompanied by strong stock price movement and strong 
+stock volume, there may very well be a good reason why that is happening. That rea­
+son will probably become public knowledge shortly in the form of a news event. In 
+fact, a major market-maker once said he believed that rrwst increases in implied 
+volatility were eventually justified - that is, some corporate news item was released 
+that made the stock jump. Hence, a volatility seller should avoid situations such as 
+these. Any sudden increase in implied volatility should probably be viewed as a 
+potential news story in the making. These situations are not what a neutral volatility 
+seller wants to get into. 
+On the other hand, if options have become expensive as a result of corporate 
+news, then the volatility seller can feel more comfortable making a trade. Perhaps the 
+company has announced poor earnings and the stock has taken a beating while 
+implied volatility rose. In this situation, one can assess the information and analyze it 
+clearly; he is not dealing with some hidden facts known to only a few insider traders. 
+With clear analysis, one might be able to develop a volatility selling strategy that is 
+prudent and potentially profitable. 
+Another situation in which options become expensive in the wake of market 
+action is during a bear market in the underlying. This can be true for indices, stocks, 
+and futures contracts. The Crash of '87 is an extreme example, but implied volatility 
+shot through the roof during the crash. Other similar sharp market collapses - such 
+as October 1989, October 1997, and August-September 1998 - caused implied 
+volatility to jump dramatically. In these situations, the volatility seller knows why