Chapter 39: Volatility Trading Techniques 823 
FIGURE 39-3. 
Stock chart of RMBS. 
19. 000 17. 250 18. 875 20010410 
30.000 
22. 000 
14. 000 
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! : : : ; 1 : : 1 r : ! : : : : ; : : : : : i l : l : 6. ooo 
99 M il M :i J ii s b N b J F M il M :i J il s b N b J F h 1 
What this method may be best used for is to complement the other methods 
described previously, in order to give the volatility trader some perspective on how 
volatile he can expect the underlying instrument to be; but it obviously has to be 
taken only as a general guideline. 
CHECK THE FUNDAMENTALS 
Once these mispriced options have been found, it is always imperative to check the 
news to see if there is some fundamental reason behind it. For example, if the options 
are extremely cheap and one then checks the news stories and finds that the under­
lying stock has been the beneficiary of an all-cash tender offer, he would not buy 
those options. The stock is not going to go anywhere, and in fact will disappear if the 
deal goes through as planned. 
Similarly, if the options appear to be very expensive, and one checks the news 
and finds that the underlying has a product up for review before a governmental 
agency (FDA, for example), then the options should not be sold because the stock 
may be about to undergo a large gap move based on the outcome of FDA hearings. 
There could be any number of similar corporate events that would make the options 
very expensive. The seller of volatility should not try to intercede when such events 
or rumors are occurring.