Chapter 36: The Basics of Volatility Trading 739 
Note that Figure 36-4 indeed confirms the fact that $OEX options are consis­
tently overpriced. Very few charts are as one-dimensional as the $OEX chart, where 
the options were so consistently overpriced. Most stocks find the difference line 
oscillating back and forth about the zero mark. Consider Figures 36-5 and 36-6. 
Figure 36-5 shows a chart similar to Figure 36-4, comparing actual and implied 
volatility, and their difference, for a particular stock. Figure 36-6 shows the price 
graph of that same stock, overlaid on implied volatility, during the period up to and 
including the heavy shading. 
The volatility comparison chart (Figure 36-5) shows several shaded areas, dur­
ing which the stock was more volatile than the options had predicted. Owners of 
options profited during these times, provided they had a more or less neutral outlook 
on the stock. Figure 36-6 shows the stock's performance up to and including the 
March-April 1999 period - the largest shaded area on the chart. Note that implied 
volatility was quite low before the stock made the strong move from 10 to 30 in little 
more than a month. These graphs are taken from actual data and demonstrate just 
how badly out of line implied volatility can be. In February and early March 1999, 
implied volatility was at or near the lowest levels on these charts. Yet, by the end of 
March, a major price explosion had begun in the stock, one that tripled its value in 
just over a month. Clearly, implied volatility was a poor predictor of forthcoming 
actual volatility in this case. 
What about later in the year? In Figure 36-5, one can observe that implied and 
actual volatility oscillated back and forth quite a few times during the rest of 1999. It 
might appear that these oscillations are small and that implied volatility was actually 
doing a pretty good job of predicting actual volatility, at least until the final spike in 
December 1999. However, looking at the scale on the left-hand side of Figure 36-5, 
one can see that implied volatility was trying to remain in the 50% to 60% range, but 
actual volatility kept bolting higher rather frequently. 
One more example will be presented. Figures 36-7 and 36-8 depict another 
stock and its volatilities. On the left half of each graph, implied volatility was quite 
high. It was higher than actual volatility turned out to be, so the difference line in 
Figure 36-7 remains above the zero line for several months. Then, for some reason, 
the option market decided to make an adjustment, and implied volatility began to 
drop. Its lowest daily point is marked with a circle in Figure 36-8, and the same point 
in time is marked with a similar circle in Figure 36-7. At that time, options traders 
were "saying" that they expected the stock to be very tame over the ensuing weeks. 
Instead, the stock made two quick moves, one from 15 down to 11, and then anoth­
er back up to 17. That movement jerked actual volatility higher, but implied volatili­
ty remained rather low. After a period of trading between 13 and 15, during which 
time implied volatility remained low, the stock finally exploded to the upside, as evi­
denced by the spikes on the right-hand side of both Figures 36-7 and 36-8. Thus,