Chapter 28: Mathematical Applications 
TABLE 28-3. 
Distance weighting factors. 
465 
Option 
Distonce 
from 
Stock Price 
Distance 
Weighting Factor 
January 30 
January 35 
April 35 
April 40 
TABLE 28-4. 
Option's implied volatility. 
.091 (3/33) 
.061 (2/33) 
.061 (2/33) 
.212 (7 /33) 
.41 
.57 
.57 
.02 
Volume Distance Option's Implied 
Option Factor Factor Volotility 
January 30 .25 .41 .34 
January 35 .45 .57 .28 
April 35 .275 .57 .30 
April40 .025 .02 .38 
Implied = .25 x .41 x .34 + .45 x .57 x .28 + .275 x .57 x .30 + .025 x .02 x .38 
volatility. .25 x .41 + .45 x .57 + .275 x .57 + .025 x .02 
= .298 
ual option's implied volatilities. Rather, it is a composite figure that gives the most 
weight to the heavily traded, near-the-money options, and very little weight to the 
lightly-traded (5 contracts), deeply out-of-the-money April 40 call. This implied 
volatility is still a form of standard deviation, and can thus be used whenever a stan­
dard deviation volatility is called for. 
This method of computing volatility is quite accurate and proves to be sensitive 
to changes in the volatility of a stock. For example, as markets become bullish or 
bearish (generating large rallies or declines), most stocks will react in a volatile man­
ner as well. Option premiums expand rather quickly, and this method of implied 
volatility is able to pick up the change quickly. One last bit of fine-tuning needs to be 
done before the final volatility of the stock is arrived at. On a day-to-day basis, the 
implied volatility for a stock - especially one whose options are not too active may 
fluctuate more than the strategist would like. A smoothing effect can be obtained by