820 Part VI: Measuring and Trading VolatHity 
The reason that this approach has merit is that one never knows how low volatil­
ity can go, and more important, how high it can get. It was mentioned that the same 
sort of approach works well for other sentiment indicators, the put-call ratio, in par­
ticular. During the bull market of the 1990s, the equity-only put-call ratio generally 
ranged between about 30 and 55. Thus, some traders became accustomed to buying 
the market when the put-call ratio reached numbers exceeding 50 (high put-call 
ratio numbers are bullish predictors for the market in general). However, when the 
bull market ended, or at least faltered, the put-call ratios zoomed to heights near 70 
or 75. Thus, those using a static approach (that is, "Buy at 50 or higher") were buried 
as they bought too early and had to suffer while the put-call ratios went to new all­
time highs. A trend reversal approach would have saved them. It is a more dynamic 
procedure, and thus one would have let the put-call ratio continue to rise until it 
peaked. Then the market could have been bought. 
This is exactly what reading the volatility chart is about. Rather than relying on 
past data to indicate where the absolute maxima and minima of movements might 
occur, one rather notes that the volatility data is at extreme levels ( 1st percentile or 
100th percentile) and then watches it until it reverses direction. This is especially 
useful for options sellers, because it avoids stepping into the vortex of massive option 
FIGURE 39-1. 
Chart of the trend of implied volatility. 
XYZ 
,J' 
········································ · ························ ....................... ··················· 50. 0 
... · ····················· 40. 0 
Implied Volatility I/vi A r 
···-····························· .. •·•······•·········-·············································-··vw•···················)·•······ 30. 0 
All-Time Volatility Low -
, .... , ..... , .. ··················,·······~················ 
t :t·•····•····· ...•. ':·LJJSL5~?. 
--;---··········•·: 
o, b ::r F f1 h j ::r 
34.000 
32.000 
30. 000 
28. 000 
26.000 
24.000 
22.000 
20. 000