Option Volatility
  1. Option Volatility: Introduction
  2. Option Volatility: Why Is It Important?
  3. Option Volatility: Historical Volatility
  4. Options Volatility: Projected or Implied Volatility
  5. Options Volatility: Valuation
  6. Option Volatility: Strategies and Volatility
  7. Option Volatility: Vertical Skews and Horizontal Skews
  8. Option Volatility: Predicting Big Price Moves
  9. Option Volatility: Contrarian Indicator
  10. Options Volatility: Conclusion

Option Volatility: Introduction

By John Summa, CTA, PhD, Founder of OptionsNerd.com

Many beginning options traders never quite understand the serious implications that volatility can have for the options strategies they are considering.

Some of the blame for this lack of understanding can be put on the poorly written books on this topic, most of which offer options strategies boilerplate instead of any real insights into how markets actually work in relation to volatility. However, if you're ignoring volatility, you may only have yourself to blame for negative surprises.

In this tutorial, we'll show you how to incorporate the "what if" scenarios regarding changing volatility into your trading. Clearly, movements of the underlying price can work through Delta (the sensitivity of an option's price to changes in the underlying stock or futures contract) and impact the bottom line, but so can volatility changes. We'll also explore the option sensitivity Greek known as Vega, which can provide traders with a whole new world of potential opportunity.

Many traders, eager to get to the strategies that they believe will provide quick profits, look for an easy way to trade that does not involve too much thinking or research. But in fact, more thinking and less trading can often save a lot of unnecessary pain. That said, pain can also be a good motivator, if you know how to process the experiences productively. If you learn from your mistakes and losses, it can teach you how to win at the trading game.

This tutorial is a practical guide to understanding options volatility for the average option trader. This series provides all the essential elements for a solid understanding of both the risks and potential rewards related to option volatility that await the trader who is willing and able to put them to good use.(For background reading, see The ABCs Of Option Volatility.)

Option Volatility: Why Is It Important?

  1. Option Volatility: Introduction
  2. Option Volatility: Why Is It Important?
  3. Option Volatility: Historical Volatility
  4. Options Volatility: Projected or Implied Volatility
  5. Options Volatility: Valuation
  6. Option Volatility: Strategies and Volatility
  7. Option Volatility: Vertical Skews and Horizontal Skews
  8. Option Volatility: Predicting Big Price Moves
  9. Option Volatility: Contrarian Indicator
  10. Options Volatility: Conclusion
RELATED TERMS
  1. Volatility Arbitrage

    Trading strategies that attempt to exploit differences between ...
  2. Implied Volatility - IV

    The estimated volatility of a security's price.
  3. Volatility

    1. A statistical measure of the dispersion of returns for a given ...
  4. Volatility Swap

    A forward contract whose underlying is the volatility of a given ...
  5. Time-Varying Volatility

    Fluctuations in volatility over time. Volatility is the standard ...
  6. VIX - CBOE Volatility Index

    The ticker symbol for the Chicago Board Options Exchange (CBOE) ...
RELATED FAQS
  1. How does implied volatility impact the pricing of options?

    Learn about two specific volatility types associated with options and how implied volatility can impact the pricing of options. Read Answer >>
  2. Is volatility a good thing or a bad thing from the investor's point of view, and ...

    Learn the basics of volatility in the stock market and how the increased risk provides greater opportunities for profit for ... Read Answer >>
  3. What is an option's implied volatility and how is it calculated?

    Learn what implied volatility is, how it is calculated using the Black-Scholes option pricing model and how to use a simple ... Read Answer >>
  4. What is the relationship between implied volatility and the volatility skew?

    Learn what the relationship is between implied volatility and the volatility skew, and see how implied volatility impacts ... Read Answer >>
  5. Can delta be used to calculate price volatility of an option?

    Learn how implied volatility is an output of the Black-Scholes option pricing formula, and learn about that option formula's ... Read Answer >>
  6. If the stock market is so volatile, why would I want to put my money into it?

    In this question, volatility refers to the upward and downward movement of price. The more prices fluctuate, the more volatile ... Read Answer >>

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