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+788 Part VI: Measuring and Trading VolatiDty 
+ally including gap moves. There are not always gap moves, though, over a study of 
+this length. Sometimes, there will be a more gradual transition. Consider the fact that 
+one of the stocks in the study moved 5.8 sigma in the 30 days. There weren't any huge 
+gaps during that time, but anyone who was short calls while the stock made its run 
+surely didn't think it was a gradual advance. 
+So, what does this information mean to the average option trader? For one, 
+you should certainly think twice about selling stock options in a potentially volatile 
+market ( or any market, for that matter, since these large moves are not by any means 
+limited to the volatile market periods). This statement encompasses naked option 
+selling, but also includes many forms of option selling, because of the possibilities of 
+large moves by the underlying stocks. 
+For example, covered call writing is considered to be "conservative." However, 
+when the stock has the potential to make these big moves, it will either cause one to 
+give up large upside profits or to suffer large downside losses. ( Covered call writing 
+has limited profit potential and relatively large downside risk, as does its equivalent 
+strategy, naked put selling.) When these large stock moves occur on the upside, a cov­
+ered writer is often disappointed that he gave up too much of the upside profit poten­
+tial. Conversely, if the stock drops quickly, and one is assigned on his naked put, he 
+often no longer has much appetite for acquiring the stock ( even though he said he 
+"wouldn't mind" doing so when he sold the puts to begin with). 
+Even spreading has problems along these lines. For example, a vertical spread 
+limits profits so that one can't participate in these relatively frequent large stock 
+moves when they occur. 
+What can an option seller do? First, he must carefully analyze his position and 
+allow for much larger stock movements than one would expect under the lognormal 
+distribution. Also, he must be careful to sell options only when they are expensive in 
+terms of implied volatility, so that any decrease in implied will work in his favor. 
+Probably most judicious, though, is that an option seller should really concentrate on 
+indices (or perhaps certain futures contracts), because they are statistically much less 
+volatile than stocks. Hard as it is to believe, futures are less volatile than stocks 
+(although the leverage available in futures can make them a riskier investment overall). 
+Two 30-day studies, similar to those conducted on stocks, were run on option­
+able indices, covering the same time periods: 10/22/99 to 12/7/99 for one study and 
+7/1/93 to 8/17/93 for the other. The results are shown in Tables 38-5 and 38-6. This 
+may be a somewhat distorted picture, though, because many of these indices overlap 
+(there are four Internet indices, for example). The largest mover was the Morgan 
+Stanley High-Tech Index (5 standard deviations), but it should also be noted that 
+something that is considered fairly tame, such as the Russell 2000 ($RUT), also had 
+a 3-standard deviation move in one study. The first study showed that 37% of the