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+744 Part VI: Measuring and Trading Volatility 
+ity has been selling it (or at least, when the majority is refusing to buy it), and he will 
+be selling volatility when everyone else is panicking to buy options, making them 
+quite expensive. 
+WHY DOES VOLATILITY REACH EXTREMES? 
+One can't just buy every option that he considers to be cheap. There must be some 
+consideration given to what the probabilities of stock movement are. Even more 
+important, one can't just sell every option that he values as expensive. There may be 
+valid reasons why options become expensive, not the least of which is that someone 
+may have inside information about some forthcoming corporate news (a takeover or 
+an earnings surprise, for example). 
+Since options off er a good deal of leverage, they are an attractive vehicle to any­
+one who wants to make a quick trade, especially if that person believes he knows 
+something that the general public doesn't know. Thus, if there is a leak of a takeover 
+rumor - whether it be from corporate officers, investment bankers, printers, or 
+accountants - whoever possesses that information may quite likely buy options 
+aggressively, or at least bid for them. Whenever demand for an option outstrips sup­
+ply - in this case, the major supplier is probably the market-maker - the options 
+quickly get more expensive. That is, implied volatility increases. 
+In fact, there are financial analysts and reporters who look for large increases in 
+trading volume as a clue to which stocks might be ready to make a big move. 
+Invariably, if the trading volume has increased and if implied volatility has increased 
+as well, it is a good warning sign that someone with inside information is buying the 
+options. In such a case, it might not be a good idea to sell volatility, even though the 
+options are mathematically expensive. 
+Sometimes, even more minor news items are known in advance by a small seg­
+ment of the investing community. If those items will be enough to move the stock 
+even a couple of points, those who possess the information may try to buy options in 
+advance of the news. Such minor news items might include the resignation or firing 
+of a high-ranking corporate officer, or perhaps some strategic alliance with another 
+company, or even a new product announcement. 
+The seller of volatility can watch for two things as warning signs that perhaps 
+the options are "predicting" a corporate event (and hence should be avoided as a 
+"volatility sale"). Those two things are a dramatic increase in option volume or a sud­
+den jump in implied volatility of the options. One or both can be caused by traders 
+with inside information trying to obtain a leveraged instrument in advance of the 
+actual corporate news item being made public.