Chapter 39: VolatiDty Trading Techniques 821 
buying, where the buyers perhaps have inside information about some forthcominf 
corporate event such as a takeover. True, the options might be very expensive ( 10ot 
percentile), but there is a reason they are, and those with the inside information know 
the reason, whereas the typical volatility trader might not. However, if the volatility 
trader merely waits for a downturn in implied volatility readings before selling these 
options, he will most likely avoid the majority of trouble because the options will 
probably not lose implied volatility until news comes out or until the buyers give up 
(perhaps figuring that the takeover rumor has died). 
Volatility buyers don't face the same problems with early entry that volatility 
sellers do, but still it makes sense to wait for the trend of volatility to increase (as in 
Figure 39-1) before trying to guess the bottom in volatility. Just as it is usually fool­
hardy to buy a stock that is in a severe downtrend, so it may be, too, with buying 
volatility. 
A less useful approach would be to apply the same techniques to historical 
volatility charts, for such charts say nothing about option prices. See the next section 
for expansion on these thoughts. 
COMPARING HISTORICAL VERSUS HISTORICAL 
The above paragraphs summarize the three major ways that traders attempt to find 
options that are out of line. Sometimes, another method is mentioned: comparing 
current levels of historical volatility with past levels of the same measure, historical 
volatility. This method will be described, but it is generally an inferior method 
because such a comparison doesn't tell us anything about the option prices. It would 
do little good, for example, to find that current historical volatility is in a very low per­
centile of historical volatilities, only to learn later that the options are expensive and 
that perhaps implied volatility is even higher than historical volatility. One would nor­
mally not want to buy options in that case, so the initial analysis of comparing histor­
ical to historical is a wasted effort. 
Comparing current levels of historical volatility with past measures of historical 
volatility is sort of a backward-looking approach, since historical volatility involves 
strictly the use of past stock prices. There is no consideration of implied volatility in 
this approach. Moreover, this method makes the tacit assumption that a stock's 
volatility characteristics do not change, that it will revert to some sort of "normal" past 
price behavior in terms of volatility. In reality, this is not true at all. Nearly every stock 
can be shown to have considerable changes in its historical volatility patterns over 
time.