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To: inex who wrote (221923)	1/2/2007 12:28:44 PM
From: Biomaven	Read Replies (1) \| Respond to of 275872

couldn't one argue that historical volatility does in fact play a part in the calculation Historical volatility doesn't enter the calculation directly at all. But to the extent the market looks at historical volatility as a good predictor of future volatility, then it indirectly plays a role. If there is some binary event upcoming - e.g., an earnings release, or more dramatically an upcoming FDA decision in the case of a biotech, then the market will basically ignore historical volatility. But the bottom line is that the implied volatility surface is driven by the market's belief about the future volatility of the stock. It tells you nothing at all about whether option players are bullish or bearish about the stock. One way to see this is to note that you can turn a call into a put provided you can freely short the stock: long stock = long call + short put and hence (by simple algebra) long put = long call + short stock and hence any asymmetry between the call IV and the put IV produces an arbitrage opportunity if the stock is freely shortable. Peter