838 Part VI: Measuring and Trading Volatility 
Note that the implied volatilities of the individual options range from a low of 
38% to a high of 53%. This is a rather large discrepancy for options on the same 
underlying security, but it is useful for exemplary purposes. 
A neutral strategy could be established by buying options with lower implied 
volatilities and simultaneously selling ones with higher volatilities, such as buy 10 
February 45 calls and sell 20 January 50 calls. Examples of neutral spreads will be 
expanded upon in the next chapter, when more exact measures for determining how 
many calls to buy and sell are discussed. 
Before jumping into such a position, the strategist should ask himself if there is 
a valid reason why the different options have such different implied volatilities. As a 
generalization, it might be fair to say that out-of-the-money options have slightly 
higher implieds than at-the-money ones, and that longer-term options have lower 
implieds than short-term ones. But there are many instances in which such is not the 
case, so one must be careful not to overgeneralize. 
Speculators often desire the lowest dollar-cost option available. Thus, in a 
takeover rumor situation, they would buy the out-of-the-moneys as opposed to the 
higher-priced at- or in-the-moneys. If the out-of-the-moneys are extremely expen­
sive because of a takeover rumor, then the strategist must be careful, because the 
neutral strategy concept may lead him into selling naked calls. This is not to say 
he should avoid the situation altogether; he may be able to structure a position 
with enough upside room to protect himself, or he may believe the rumors are 
false. 
Returning to the general topic of differing implied volatilities on the same 
underlying stock, the strategist might ask how he is to determine if the discrepancies 
between the individual options are significantly large to warrant attention. A mathe­
matical approach is presented at the end of the next chapter in a section on advanced 
mathematical concepts. Suffice it to say that there is a way that the differences in the 
various implieds can be reduced to a single number - a sort of "standard deviation of 
the implieds" that is easy for the strategist to use. A list of these numbers can be con­
structed, comparing which stocks or futures might be candidates for this type of neu­
tral spreading. On a given day, the list is usually quite short - perhaps 20 stocks and 
10 futures contracts will qualify. 
The concept of the implied volatilities of various options on the same underly­
ing stock remaining out of line with each other is one that needs more discussion. In 
the following section, the idea of semipermanent distortion between the volatilities 
of different striking prices is discussed.