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+738 Part VI: Measuring and Trading Volatility 
+FIGURE 36-4. 
+$OEX implied versus historical volatility. 
+10 
+Implied minus Actual 1999 Date 
+ity of $OEX options encompasses all the $OEX options, so it is different from the 
+Volatility Index ($VIX), which uses only the options closest to the money. By 
+using all of the options, a slightly different volatility figure is arrived at, as com­
+pared to $VIX, but a chart of the two would show similar patterns. That is, peaks 
+in implied volatility computed using all of the $OEX options occur at the same 
+points in time as peaks in $VIX. 
+(b) The actual volatility on the graph is a little different from what one normally 
+thinks of as historical volatility. It is the 20-day historical volatility, computed 20 
+days later than the date of the implied volatility calculation. Hence, points on the 
+implied volatility curve are matched with a 20-day historical volatility calculation 
+that was made 20 days later. Thus, the two curves more or less show the predic­
+tion of volatility and what actually happened over the 20-day period. These actu­
+al volatility readings are smoothed as well, with a 20-day moving average. 
+(c) The difference between the two is quite simple, and is shown as the bottom 
+curve on the graph. A "zero" line is drawn through the difference. 
+When this "difference line" passes through the zero line, the projection of 
+volatility and what actually occurred 20 days later were equal. If the difference line 
+is above the zero line, then implied volatility was too high; the options were over­
+priced. Conversely, if the difference line is below the zero line, then actual volatility 
+turned out to be greater than implied volatility had anticipated. The options were 
+underpriced in that case. Those latter areas are shaded in Figure 36-4. Simplistically, 
+you would want to own options during the shaded periods on the chart, and would 
+want to be a seller of options during the non-shaded areas.