Chapter 37: How Volatility Affects Popular Strategies 761 
tain the call's value over a 6-month time period is an increase in implied volatility to 
27%. Taken from the viewpoint of the option seller, this is perhaps most enlighten­
ing: If you sell a one-year (LEAPS) option and six months pass, during which time 
implied volatility increases from 20% to 27% - certainly quite possible -you will have 
made nothing! The call will still be selling for the same price, assuming the stock is 
still selling for the same price. 
Finally, it was mentioned earlier that implied volatility often explodes during a 
market crash. In fact, one could determine just how much of an increase in implied 
volatility would be necessary in a market crash in order to maintain the call's value. 
This is similar to the first example in this section, but now the stock price will be 
allowed to decrease as well. Table 37-5, then, shows what implied volatility would be 
required to maintain the call's initial value (a price of 4.64), when the stock price falls. 
The other factors remain the same: time remaining (3 months), striking price (100), 
and interest rate (5% ). Again, this table shows instantaneous price changes. In real 
life, a slightly higher implied volatility would be necessary, because each market crash 
could take a day or two. 
Thus, from Table 37-5, one could say that even if the underlying stock dropped 
20 points (which is 20% in this case) in one day, yet implied volatility exploded from 
20% to 67% at the same time, the call's value would be unchanged! Could such an 
outrageous thing happen? It has: In the Crash of '87, the market plummeted 22% in 
one day, while the Volatility Index ($VIX) theoretically rose from 36% to 150% in one 
day. In fact, call buyers of some $OEX options actually broke even or made a little 
money due to the explosion in implied volatility, despite the fact that the worst mar­
ket crash in history had occurred. 
If nothing else, these examples should impart to the reader how important it is 
to be aware of implied volatility at the time an option position is established. If you 
are buying options, and you buy them when implied volatility is "low," you stand to 
TABLE 37-5 
Stock Price 
100 
95 
90 
85 
80 
75 
70 
Implied Volatility Necessary for Call to Maintain Value 
20% (the initial parameters) 
33% 
44% 
55% 
67% 
78% 
89%