728 Part VI: Measuring and Trading Volatility 
FIGURE 36-1. 
A sample chart. 
Buy at these points. 
So, many traders observed this pattern and have become adherents of trying to 
predict volatility. Notice that if one is able to isolate volatility, he doesn't care where 
the stock price goes he is just concerned with buying volatility near the bottom of 
the range and selling it when it gets back to the middle or high end of the range, or 
vice versa. In real life, it is nearly impossible for a public customer to be able to iso­
late volatility so specifically. He will have to pay some attention to the stock price, but 
he still is able to establish positions in which the direction of the stock price is irrel­
evant to the outcome of the position. This quality is appealing to many investors, who 
have repeatedly found it difficult to predict stock prices. Moreover, an approach such 
as this should work in both bull and bear markets. Thus, volatility trading appeals to 
a great number of individuals. Just remember that, for you personally to operate a 
strategy properly, you must find that it appeals to your own philosophy of trading. 
Trying to use a strategy that you find uncomfortable will only lead to losses and frus­
tration. So, if this somewhat neutral approach to option trading sounds interesting to 
you, then read on. 
DEFINITIONS OF VOLATILITY 
Volatility is merely the term that is used to describe how fast a stock, future, or index 
changes in price. When one speaks of volatility in connection with options, there are 
two types of volatility that are important. The first is historical volatility, which is a 
measure of how fast the underlying instrument has been changing in price. The other 
is implied volatility, which is the option market's prediction of the volatility of the