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+830 Part VI: Measuring and Trading Volatility 
+Example: A trader is considering the purchase of the XYZ October 40 straddle for 
+11 points, with the stock at 39.60. The options are cheap and the probabilities of suc­
+cess appear to be good, according to the probability calculator. The question that now 
+needs to be asked and answered is this: "In the past, has this stock been able to move 
+11 points in 10 months (the time remaining in the straddle's life)?" Or, more impor­
+tantly, since 11 divided by 39.60 is about 28%, "Has this stock been able to make 
+moves of 28% over 10 months, in the past?" The answers to these questions can be 
+readily obtained if stock price history data is available. One could even look at a chart 
+of the stock and attempt to answer the questions himself without the aid of a com­
+puter, but computer analysis of the price history is more rigorous and is therefore 
+encouraged. 
+The answers can be expressed in the form of probabilities, much as the results 
+of the probability calculator are. 
+Suppose one determines that the stock has been able to move 11 points in 10 
+months 77% of the time in the past. That's okay, but not great. However, when one 
+looks at the price chart ofXYZ, he sees that it traded at much lower prices - near $10 
+a share - for a long time before rising to its current levels. It would be very hard to 
+expect a $10 stock to move 11 points in 10 months. That's why the second figure, the 
+one involving the 28% move, is the more significant one. In this case, one might find 
+that XYZ has been able to move 28% in 10 months over 90% of the time in the past. 
+Now one has what appears to be a decent-looking straddle buy. 
+This analysis of past prices can be done in a more sophisticated manner. Rather than 
+just asking whether or not the stock has moved the required distance in the past, one 
+might want to see just how the stock's movements "look." That is, there are a couple 
+of scenarios under which the past movements might look attractive, but upon closer 
+examination, one would not be so sanguine. 
+For example, what ifXYZ had repeatedly moved 28%, but never much more in 
+most of the IO-month periods that comprise its stock history? Then, one would be 
+less inclined to want to own this straddle. 
+Another scenario of past movements might be that XYZ had made moves that 
+one could not reasonably expect to be repeated. Perhaps there was a huge gap down 
+on an earnings shortfall, or if it was an Internet stock around the tum of the millen­
+nium, it had a huge move upward, followed by a huge move downward. That would 
+be another nonrepeating type of move, because absent the Internet mania, the stock 
+might have been a rather range-bound item both prior to and after the one huge, 
+round-trip move.