844 Part VI: Measuring and Trading VolatiRty 
tage of the volatility skew. The put backspread is best established when the overall 
level of implied volatility is in a low percentile. Finally, the call ratio spread has a 
great deal of risk to the upside ( and futures prices can fly to the upside quickly, espe­
cially if bad fundamental conditions develop, such as weather in the grain markets). 
The call ratio spread would best be used when implied volatilities are already in a 
high percentile. 
As a general comment, it should be noted that if the volatility skew disappears 
while the trader has the position in place, a profit will generally result. It would nor­
mally behoove the strategist to take the profit at that time. Otherwise, follow-up 
action should adhere to the general kinds of action recommended for the strategies 
in question: protective action to prevent large losses in the case of the ratio spreads, 
or the taking of partial profits and possibly rolling the long options to a more at-the­
money strike in the case of the backspread strategies. 
SUMMARY OF VOLATILITY SKEWING 
Whenever volatility skewing exists - no matter what market - opportunities arise for 
the neutral strategist to establish a position that has advantages. These advantages 
arise out of the fact that normal market movements are different from what the 
options are implying. Moreover, the options are wrong when there is skewing at all 
strikes, from the lowest to the highest. The strategist should be careful to project his 
profits prior to expiration using the same skewing, for it may persist for some time to 
come. However, at expiration, it must of course disappear. Therefore, the strategist 
who is planning to hold the position to expiration will find that volatility skewing has 
presented him with an opportunity for a positive expected return. 
SUMMARY OF VOLATILITY TRADING 
The theoretical trading of options, mostly in a neutral manner, has evolved into one 
large branch - volatility trading. This part of the book has attempted to lay out the 
foundations, structures, and practices prevalent in this branch of trading. As the read­
er can see, there are some sophisticated techniques being applied - not so much in 
terms of strategy, but in terms of the ways that one looks at volatility and in the ways 
that stocks can move. 
Statistical methods are used liberally in trying to determine the ways that either 
volatility can move or stocks can move. The probability calculators, stock price dis­
tributions, and related topics are all statistical in nature. The volatility trader is intent 
on finding situations in which current market implied volatility is incorrect, either in 
its absolute value or in the skew that is prevalent in the options on a particular under-