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+748 Part VI: Measuring and Trading Volatility 
+Sellers of volatility, however, have to be a lot more careful. One mistake could 
+be the last one. Selling naked calls that seem terrifically expensive by historic stan­
+dards could be ruinous if a takeover bid subsequently emerges at a large premium to 
+the stock's current price. Even put sellers must be careful, although a lot of traders 
+think that selling naked puts is safe because it's the same as buying stock. But who 
+ever said buying stock wasn't risky? If the stock literally collapses - falling from 80, 
+say, to 15 or 20, as Oxford Health did, or from 30 to 2 as Sunrise Technology did -
+then a put seller will be buried. Since the risk of loss from naked option selling is 
+large, one could be wiped out by a huge gap opening. That's why it's imperative to 
+study why the options are expensive before one sells them. If it's known, for exam­
+ple, that a small biotech company is awaiting FDA trial results in two weeks,~and all 
+the options suddenly become expensive, the volatility seller should not attempt to be 
+a hero. It's obvious that at least some traders believe that there is a chance for the 
+stock to gap in price dramatically. It would be better to find some other situation in 
+which to sell options. 
+The seller of futures options or index options should be cautious too, although 
+there can't be takeovers in those markets, nor can there be a huge earnings surprise 
+or other corporate event that causes a big gap. The futures markets, though do have 
+things like crop reports and government economic data to deal with, and those can 
+create volatile situations, too. The bottom line is that volatility selling - even hedged 
+volatility selling - can be taxing and aggravating if one has sold volatility in front of 
+what turns out to be a news item that justifies the expensive volatility. 
+SUMMARY 
+Volatility trading is a predictable way to approach the market, because volatility 
+almost invariably trades in a range and therefore its value can be estimated with a 
+great deal more precision than can the actual prices of the underlyings. Even so, one 
+must be careful in his approach to volatility trading, because diligent research is 
+needed to determine if, in fact, volatility is "cheap" or "expensive." As with any sys­
+tematic approach to the market, if one is sloppy about his research, he cannot expect 
+to achieve superior results. In the next few chapters, a good deal of time will be spent 
+to give the reader a good understanding of how volatility affects positions and how it 
+can be used to construct trades with positive expected rates of return.