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+742 Part VI: Measuring and Trading Volatility 
+implied volatility was a poor predictor of actual volatility for most of the time on these 
+graphs. Moreover, implied volatility remained low at the right-hand side of the charts 
+(January 2000) even though the stock doubled in the course of a month. 
+The important thing to note from these figures is that they clearly show that 
+implied volatility is really not a very good predictor of the actual volatility that is to 
+follow. If it were, the difference line would hover near zero most of the time. Instead, 
+it swings back and forth wildly, with implied volatility over- or underestimating actu­
+al volatility by quite wide levels. Thus, the current estimates of volatility by traders 
+(i.e., implied volatility) can actually be quite wrong. 
+Conversely, one could also say that historical volatility is not a great predictor of 
+volatility that is to follow, either, especially in the short term. No one really makes any 
+claims that it is a good predictor, for historical volatility is merely a reflection of what 
+has happened in the past. All we can say for sure is that implied and historical volatil­
+ity tend to trade within a range. 
+One thing that does stand out on these charts is that implied volatility seems to 
+fluctuate less than actual volatility. That seems to be a natural function of the volatil­
+ity predictive process. For example, when the market collapses, implied volatilities of 
+options rise only modestly. This can be observed by again referring to Figure 36-4, 
+the $0EX option example. The only shaded area on the graph occurred when the 
+market had a rather sharp sell-off during October 1999. In previous years, when 
+there had been even more severe market declines (October 1997 or August-October 
+1998) $0EX actual volatility had briefly moved above implied volatility (this data for 
+1997 and 1998 is shown in Figure 36-9). In other words, option traders and market­
+makers are predicting volatility when they price options, and one tends to make a 
+FIGURE 36-9. 
+$OEX implied versus historical volatility, 1997-1998. 
+Actual 
+40 
+30 
+10 
+0 
+D J F M A 
+-20 1997 1998