By John Summa, CTA, PhD, Founder of OptionsNerd.com
Volatility changes can have a potential impact  good or bad  on any options trade you are preparing to implement. In addition to this socalled Vega risk/reward, this part of the options volatility tutorial will teach you about the relationship between historical volatility (also known as statistical, or SV) and implied volatility (IV), including how they are calculated, although most trading platforms provide this for you.
Perhaps the most practical aspect of a volatility perspective on options strategies and option prices is the opportunity it affords you to determine relative valuation of options. Due to the nature of markets, options may often price in events that are expected. Therefore, when looking at option prices and considering certain strategies, knowing whether options are "expensive" or "cheap" can provide very useful information about whether you should be selling options or buying them. Obviously, the old adage of buy low, sell high applies as much here as it does in the world of stocks and commodities.
In this tutorial, we'll look at what is meant by historical volatility and implied volatility, which is then used to determine whether options are expensive (meaning are they trading at prices high relative to past levels) or cheap. Also, we'll look at the question of whether options are overvalued or undervalued, which pertains to theoretical prices versus market prices and how historical and implied volatility are incorporated into the story.
Another important use of volatility analysis is in the selection of strategies. Every option strategy has an associated Greek value known as Vega, or position Vega. Therefore, as implied volatility levels change, there will be an impact on the strategy performance. Positive Vega strategies (like long puts, backspreads and long strangles/straddles) do best when implied volatility levels rise. Negative Vega strategies (like short options, ratio spreads and short strangles/ straddles) do best when implied volatility is falling. Clearly, knowing where implied volatility levels are and where they are likely to go once in a trade can make all the difference in the outcome of strategy. But you first have to know what Vega is and how to interpret it before you can put it to good use. (For more on these strategies, see the Option Spread Strategies tutorial.)
Finally, we'll look at uses of options volatility in relation to vertical and horizontal skews, where the implied volatility levels of each strike are compared in the same expiration month (vertical) and across different months (horizontal). This is followed by a look using implied volatility as a predictor of the future direction of stocks and stock indexes. Implied volatility can be used as a predictor of price from two angles: as a contrarian, when implied volatility has moved too far  high or low  or as a sign of potentially explosive price moves when implied volatility is extremely high for no apparent reason. Typically, the latter occurs when there is a pending unknown or even known event but it is not clear which way the stock will move. All that the extremely high implied volatility tells you is that something big is in the offing.
In all parts of the tutorial, we'll provide key insights and practical tips about how to use the concepts mentioned above as they relate to volatility and Vega.In the meantime, spend some more time reading and studying about volatility than trying to trade  you will not be disappointed. Good luck!

Trading
Implied Volatility: Buy Low And Sell High
This value is an essential ingredient in the option pricing recipe. 
Trading
Understanding Vega
In options trading, vega represents the amount option prices are expected to change in response to a change in the underlying assetâ€™s implied volatility. 
Investing
Options Trading: How Implied Volatility Affects Calendar Spread
Even if the risk curves for a calendar spread look enticing, a trader needs to assess implied volatility for the options on the underlying security. 
Markets
An Option Strategy for Trading Market Bottoms
The reverse calendar spreads offers a lowrisk trading setup that has profit potential in both directions. 
Investing
What is Meant by Implied Volatility?
The estimated volatility of a security's price. 
Trading
Option PriceVolatility Relationship: Avoiding Negative Surprises
Learn about the pricevolatility dynamic and its dual effect on option positions. 
Trading
Stock Options: What's Price Got To Do With It?
A thorough understanding of risk is essential in options trading. So is knowing the factors that affect option price. 
Trading
The Anatomy of Options
Find out how you can use the "Greeks" to guide your options trading strategy and help balance your portfolio. 
Trading
How To Profit From Volatility
We explain four key strategies to profit fom volatility in markets. 
Trading
Getting To Know The "Greeks"
Understanding price influences on options positions requires learning about delta, theta, vega and gamma.