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+Chapter 36: The Basics of Volatility Trading 135 
+might not seem all that attractive. That is, if the first percentile of XYZ options were 
+at an implied volatility reading of 39% and the 100th percentile were at 45%, then a 
+reading of 40% is really quite mundane. There just wouldn't be much room for 
+implied volatility to increase on an absolute basis. Even if it rose to the 100th per­
+centile, an individual XYZ option wouldn't gain much value, because its implied 
+volatility would only be increasing from about 40% to 45%. 
+However, if the distribution of past implied volatility is wide, then one can truly 
+say the options are cheap if they are currently in a low percentile. Suppose, rather 
+than the tight range described above, that the range of past implied volatilities for 
+XYZ instead stretched from 35% to 90% - that the first percentile for XYZ implied 
+volatility was at 35% and the 100th percentile was at 90%. Now, if the current read­
+ing is 40%, there is a large range above the current reading into which the options 
+could trade, thereby potentially increasing the value of the options if implied volatil­
+ity moved up to the higher percentiles. 
+What this means, as a practical matter, is that one not only needs to know the 
+current percentile of implied volatility, but he also needs to know the range of num­
+bers over which that percentile was derived. If the range is wide, then an extreme 
+percentile truly represents a cheap or expensive option. But if the range is tight, then 
+one should probably not be overly concerned with the current percentile of implied 
+volatility. 
+Another facet of implied volatility that is often overlooked is how it ranges with 
+respect to the time left in the option. This is particularly important for traders of 
+LEAPS (long-term) options, for the range of implied volatility of a LEAPS option will 
+not be as great as that of a short-term option. In order to demonstrate this, the 
+implied volatilities of $OEX options, both regular and LEAPS, were charted over 
+several years. The resulting scatter diagram is shown in Figure 36-3. 
+Two curved lines are drawn on Figure 36-3. They contain most of the data 
+points. One can see from these lines that the range of implied volatility for near-term 
+options is greater than it is for longer-term options. For example, the implied volatil­
+ity readings on the far left of the scatter diagram range from about 14% to nearly 40% 
+(ignore the one outlying point). However, for longer-term options of 24 months or 
+more, the range is about 17% to 32%. While $0EX options have their own idiosyn­
+cracies, this scatter diagram is fairly typical of what we would see for any stock or 
+index option. 
+One conclusion that we can draw from this is that LEAPS option implied 
+volatilities just don't change nearly as much as those of short-term options. That can 
+be an important piece of information for a LEAPS option trader especially if he is 
+comparing the LEAPS implied volatility with a composite implied volatility or with 
+the historical volatility of the underlying.