464 Part IV: Additional Considerations 
TABLE 28-1. 
Implied volatilities, closing price, and volume. 
Option 
Option Price Volume 
January 30 41/2 
January 35 11/2 
April 35 21/2 
April 40 11/2 
TABLE 28-2. 
Volume weighting factors. 
Option 
January 30 
January 35 
April 35 
April 40 
Volume 
50 
90 
55 
5 
50 
90 
55 
~ 
200 
Implied 
Volatility 
.34 
.28 
.30 
.38 
Volume Weighting Factor 
.25 (50/200) 
.45 (90/200) 
.275 (55/200) 
.025 ( 5/200) 
where x is the percentage distance between stock price and strike price and a is the 
maximum percentage distance at which the modeler wants to give any weight at all 
to the option's implied volatility. 
Example: An investor decides that he wants to discard options from the weighting 
criterion that have striking prices more than 25% from the current stock price. The 
variable, a, would then be equal to .25. The weighting factors, with XYZ at 33, could 
thus be computed as shown in Table 28-3. To combine the weighting factors for both 
volume and distance from strike, the two factors are multiplied by the implied volatil­
ity for that option. These products are summed up for all the options in question. 
This sum is then divided by the products of the weighting factors, summed over all 
the options in question. As a formula, this would read: 
Implied _ I,(Volume factor x Distance factor x Implied volatility) 
volatility - I,(Volume factor x Distance factor) 
In our example, this would give an implied volatility for XYZ stock of 29.8% 
(Table 28-4). Note that the implied volatility, .298, is not equal to any of the individ-