736 Part VI: Measuring and Trading Volatility 
Once again, consider Figure 36-3. While it is difficult to discern from the graph 
alone, the 10th percentile of $OEX composite implied volatility, using all of the data 
points given, is 17%. The line that marks this level (the tenth percentile) is noted on 
the right side of the scatter diagram. It is quite easy to see that the LEAPS options 
rarely trade at that low volatility level. 
In Figure 36-3, the distance between the curved lines is much greater on the 
left side (i.e., for shorter-term options) than it is on the right side (for longer-term 
options). Thus, it's difficult for the longer-term options to register either an extreme­
ly high or extremely low implied volatility reading, when all of the options are con­
sidered. Consequently, LEAPS options will rarely appear "cheap" when one looks at 
their percentile of implied volatility, including all the short-term options, too: 
One might say that, if he were going to buy long-term options, he should look 
only at the size of the volatility range on the right side of the scatter diagram. Then, 
he could make his decision about whether the options are cheap or not by only com­
paring the current reading to past readings of long-term options. This line of think­
ing, though, is somewhat fallacious reasoning, for a couple of reasons: First, if one 
holds the option for any long period of time, the volatility range will widen out and 
there is a chance that implied volatility could drop substantially. Second, the long­
term volatility range might be so small that, even though the options are initially 
cheap, quick increase in implied volatility over several deciles might not translate into 
much of a gain in price in the short term. 
FIGURE 36-3. Implied volatilities of $OEX options over several 
years. 
50 
45 
40 
~ 35 
~ 30 
g 25 "O 
.91 20 C. 
E 15 -0th 
10 
5 
0 
0 10 20 30 40 
Time to Expiration (months)