Chapter 39: Volatility Trading Techniques 819 
ly not much different from the GARCH approach, which is considered to be highly 
advanced. When one views the volatility chart, he is not looking for chart patterns like 
technical analysts might do with stock charts: support, resistance, head-and-shoul­
ders, flags, pennants, and so on. Rather, he is merely looking for the trend of volatil­
ity to change. 
This is a valid approach in the use of many indicators, particularly sentiment 
indicators, that can go to extreme levels. By waiting for the trend to change, the user 
is not subjecting himself to buying into the midst of a downtrend in volatility, nor sell­
ing into the midst of a steep uptrend in volatility. 
Example: Suppose a volatility trader has determined that the current level of implied 
volatility for XYZ stock is in the 1st percentile of all past readings. Thus, the options 
are as cheap as they've ever been. Perhaps, though, the overall market is experienc­
ing a very dull period, or XYZ itself has been in a prolonged, tight trading range -
either of which might cause implied volatility to decline steadily and substantially. 
Having found these cheap options, he wants to buy volatility. However, he has no 
guarantee that implied volatility won't continue to decline, even though it is already 
as cheap as it's ever been. 
If he follows the technique of waiting for a reversal in the trend of implied 
volatility, then he would keep an eye on XYZ's implied volatility daily until it had at 
least a modest increase, something to indicate that option buyers have become more 
interested in XYZ's options. The chart in Figure 39-1 shows how this situation might 
look. 
There are a number of items marked on the chart, so it will be described in 
detail. There are two graphs in Figure 39-1: The top line is the implied volatility 
graph, while on the bottom is the stock price chart. The implied volatility chart shows 
that, near the first ofJune, it made new all-time lows near 28% (i.e., it was in the 0th 
percentile of implied volatility). Hence, one might have bought volatility at that 
point. However, it is obvious that implied volatility was in a steep downtrend at that 
time, so the volatility trader who reads the charts might have decided to wait for a 
pop in volatility before buying. This turned out to be a judicious decision, because 
the stock went nowhere for nearly another month and a half, all the while volatility 
was dropping. At the right of the chart, implied volatility has dropped to nearly 20%. 
The solid lines on the two graphs indicate the data that is known about the 
implied volatility and price history of XYZ. The dotted lines indicate a scenario that 
might unfold. If implied volatility were to jump ( and the stock price might jump, too), 
then one might think that the trend of implied volatility was no longer down, and he 
would then buy volatility.