822 Part VI: Measuring and Trading Volatility 
Consider the historical volatilities of one of the wilder stocks of the tech stock 
boom, Rambus (RMBS). Historical volatilities had ranged between 50% and ll0%, 
from the listing of RMBS stock, through February 2000. At that time, the stock aver­
aged a price of about $20 per share. 
Things changed mightily when RMBS stock began to rise at a tremendous rate 
in February 2000. At that time, the stock blasted to ll5, pulled back to 35, made a 
new high near 135, and then collapsed to a price near 20. Hence, the stock itself had 
completed a wild round-trip over the two-year period. See Figures 39-2 and 39-3 for 
the stock chart and the historical volatility chart of RMBS over the time period in 
question. 
As this happened, historical volatility skyrocketed. After February 2000, and 
well into 2001, historical volatility was well above 120%. Thus it is clear that the 
behavior patterns of Rambus changed greatly after February 2000. However, if one 
had been comparing historical volatilities at any time after that, he would have erro­
neously concluded that RMBS was about to slow down, that the historic volatilities 
were too high in comparison with where they'd been in the past. If this had led one 
to sell volatility on RMBS, it could have been a very expensive mistake. 
While RMBS may be an extreme example, it is certainly not alone. Many other 
stocks experienced similar changes in behavior. In this author's opinion, such behav­
ior debunks the usefulness of comparing historical volatility with past measures of 
historical volatility as a valid way of selecting volatility trades. 
FIGURE 39-2. 
Historical volatilities of RMBS. 
RMBS 19.000 17.250 18.875 20010410 
............ ······· 60.0 
· ·················· 50.0 
...... ······· 40. 0 
39 M i·h··-:; s ·~ s a ~--f:i--·5--r;;····~··h s·s- A s a N □ s--r·;; r