906 Part VI: Measuring and Trading Volatility 
Implied deviation = sqrt (sum of differences from mean) 2/(# options - 1) 
XYZ:50 
Implied 
Option Volatility 
October 45 call 21% 
November 45 call 21% 
January 45 call 23% 
October 50 call 32% 
November 50 call 30% 
January 50 call 28% 
October 55 call 40% 
November 55 call 37% 
January 55 call 34% 
Average: 30.44% 
Sum of ( difference from avg)2 = 389.26 
Implied deviation = sqrt (sum of diff)2/(# options - 1) 
= sqrt (389.26 I 8) 
= 6.98 
Difference 
from Average 
-9.44 
-9.44 
-7.44 
+ 1.56 
-0.44 
-2.44 
+9.56 
+6.56 
+3.56 
This figure represents the raw standard deviation of the implied volatilities. To 
convert it into a useful number for comparisons, one must divide it by the average 
implied volatility. 
P d . . Implied deviation ercent eV1at10n = A . 1. d verage imp ie 
= 6.98/30.44 
= 23% 
This "percent deviation" number is usually significant if it is larger than 15%. 
That is, if the various options have implied volatilities that are different enough from 
each other to produce a result of 15% or greater in the above calculation, then the 
strategist should take a look at establishing neutral spreads in that security or futures 
contract. 
The concept presented here can be refined further by using a weighted average 
of the implieds ( taking into consideration such factors as volume and distance from the 
striking price) rather than just using the raw average. That task is left to the reader.