Candlestick Trading Blog
October 21, 2009
Options Volatility
| What is Options Volatility? It is very important that options traders understand volatility as they learn how to trade options. Volatility tells the trader how much movement a stock is estimated to make over a specific amount of time. This helps the investor to determine whether or not an option is expensive or cheap in relation to its historical price. Through determining the volatility of a stock, investors are able to determine whether or not the option is likely to expire in or out-of-the-money. There are actually two types of options volatility when trading options. There is implied volatility and historical volatility. Implied volatility is the view of where volatility will be in the future. Pricing models are used by investors when options trading in order to determine the fair value of an option. This value tells the investors if an option is undervalued or overvalued. The option will either have high volatility or low volatility and this is determined by comparing the current market price of the option to the fair value. If the market price of the option is less than this value, then the option is cheap. Conversely, if the price is more than this value then the option is considered to be expensive. The historical volatility is the second type of option volatility and is it is calculated by using standard deviation. The calculation is statistical and it tells the trader how fast the price movements have been over a specific period of time. This deviation, which is used to determine this second type of volatility, measures the distribution of a group of data points from its average. The more spread out this data is the higher the deviation is and conversely, if the data is not as dispersed then the deviation is said to be lower. Basically, your options education should teach you that those assets that have price movements that are slow and expected are considered to have low volatility. Those assets that have large and recurring movements are considered to have high volatility. In summary, some concepts that you should learn about if you would like to trade the options markets include implied and historical volatility, and standard deviation. There are also many other concepts to understand when learning how to trade options. Continue your options trading education and see if this method of trading works for you. Online Stock Market Reviews presented live via the internet by Stephen Bigalow |
|
 |
|
 |
|
 |
|
 |
------------------------------------------------------------------- -
0 Comments:
Post a Comment
<< Blog Home