760 Part VI: Measuring and Trading Volatility 
Finally, to be able to completely compare this example with the previous one, it 
is necessary to see what implied volatility would have to rise to in order to offset the 
effect of yet another month's time decay. It turns out to be over 140%: 
Stock Price: 
Strike Price: 
Time Remaining: 
Implied Volatility: 
Theoretical Call Value: 
100 
100 
1 month 
140.9% 
16.45 
Table 37-4 summarizes the results of these examples, showing the levels to 
which implied volatility would have to rise to maintain the call's value as time passes. 
Are the volatility increases in the latter example less likely to occur than the 
ones in the former example? Probably yes - certainly the last one, in which implied 
volatility would have to increase from 80% to nearly 141 % in order to maintain the 
call's value. However, in another sense, it may seem more reasonable: Note that the 
increase in volatility from 20% to 26% is a 30% increase. That is, 20% times 1.30 
equals 26%. That's what's required to maintain the call's value for the lower volatility 
over the first month - an increase in the magnitude of implied volatility of 30%. At 
the higher volatility, though, an increase in magnitude of only about 25% is required 
(from 80% to 99%). Thus, in those terms, the two appear on more equal footing. 
What makes the top line of Table 37-4 appear more likely than the bottom line 
is merely the fact that an experienced option trader knows that many stocks have 
implied volatilities that can fluctuate in the 20% to 40% range quite easily. However, 
there are far fewer stocks that have implied volatilities in the higher range. In fact, 
until the Internet stocks got hot in the latter portion of the 1990s, the only ones with 
volatilities like those were very low-priced, extremely volatile stocks. Hence one's 
experience factor is lower with such high implied volatility stocks, but it doesn't mean 
that the volatility fluctuations appearing in Table 37-4 are impossible. 
If the reader has access to a software program containing the Black-Scholes 
model, he can experiment with other situations to see how powerful the effect of 
implied volatility is. For example, without going into as much detail, if one takes the 
case of a 12-month option whose initial implied volatility is 20%, all it takes to main-
TABLE 37-4 
Initial Implied 
Volatility 
20% 
80% 
Volatility Leveled Required to Maintain Call Value ... 
... After One Month ... After Two Months 
26% 
99% 
38% 
141%