What is 'Volatility Quote Trading'

Volatility quote trading is a method of quoting option contracts in which bids and asks are quoted according to their implied volatilities rather than actual prices.

BREAKING DOWN 'Volatility Quote Trading'

Volatility quote trading commonly involves trading based on the anticipated volatility in the future of a particular index or security.

Traders are determining their strategy based not on prices, but on their assessed volatility of the underlying asset. These investors are more concerned with whether the price will go up or down, and by how much, as opposed to focusing on the actual dollar amounts of the price. So rather than the focus being placed on a specific figure, price or dollar amount, the focus instead is on fluctuations and activity.

This process of volatility quote trading and the concepts involved in executing this strategy are rather challenging, and is something that is not generally recommended for novice investors.

Used mainly by sophisticated investors, volatility quotes benefit those investors who trade upon volatility rather than price. These investors are typically interested in the likelihood of a contract moving up or down in price rather than in its actual cost.

Volatility Quote Trading and the Concept of Volatility

Volatility with relation to stocks and other securities refers to the variations in pricing formulas for options, which illustrate the range in which the underlying asset’s value will fluctuate between the current time and whenever the option expires. Volatility in an investing lingo can also be used to mean the measure, in statistical context, of the dispersion of returns for a certain security, or for a market index.

Typically, analysts would look at the standard deviation as the common way to measure volatility. That is a data point that measures the variances from the average. In a formula, it is calculated by taking the square root of the average variance from its mean. That’s a complicated calculation that would likely be intimidating to the average investor.

For most investors, the concept of volatility boils down to something much more basic and simple: the more volatile a security is, the more unpredictable its performance. In other words, the higher the volatility, the greater the level of risk. So the appeal of this type of investing would depend in large part on the investor’s comfort with increased risk.

A related concept is the strategy of volatility arbitrage, which involves trying to figure out the difference between the anticipated future volatility of a stock or other asset and the implied volatility of options that are connected to that underlying asset.

  1. Implied Volatility - IV

    The estimated volatility of a security's price derived from an ...
  2. Quote

    A quote is a price determined at a specific instance of time ...
  3. Quoted Price

    A quoted price is the most recent price at which an investment ...
  4. Local Volatility

    Local volatility is a volatility measure used in quantitative ...
  5. Vega

    Vega is a measurement of an option's sensitivity to changes in ...
  6. Option Premium

    An option premium is the income received by an investor who sells ...
Related Articles
  1. Trading

    Options: Implied Volatility and Calendar Spread

    Even if risk curves on a calendar spread look enticing, a trader needs to assess implied volatility.
  2. Trading

    Ratio Writing: A High-Volatility Options Strategy

    Selling a greater number of options than you buy profits from a decline back to average levels of implied volatility.
  3. Trading

    An Option Strategy for Trading Market Bottoms

    A reverse calendar spread offers a low-risk trading setup with profit potential in both directions.
  4. Trading

    Why Volatility is Important For Investors

    Many investors realize the stock market is a volatile place to invest their money, learn how volatility affects investors and how to take advantage of it.
  5. Investing

    How to Take Advantage of Volatility as an Investor

    Everyone talks about the downside of volatility, but it has its benefits too, including opportunities to investment entry points at lower prices.
  6. Investing

    Volatile Stocks: Great, If You Have The Stomach

    Volatile stocks can be a lucrative opportunity for short-term traders. For buy-and-hold investors, it's a much different story.
  7. Investing

    3 Reasons to Ignore Market Volatility (VIX)

    If you can keep your head while those about you are losing theirs, you can make a nice return in roiling markets.
  8. Insights

    Low Volatility? You Have Options

    With volatility at record lows, options have never been cheaper.
  9. Investing

    A Guide to Understanding Market Volatility

    Market volatility is inevitable. Understanding how it works can help investors keep calm during periods of short-term declines.
  1. 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 >>
  2. Are Bid Prices of T-Bills Higher Than the Ask?

    An ask price of a security should typically be higher than the bid price. Find out why the method of quoting bid/ask of T-bills ... Read Answer >>
  3. What do the numbers after the bid and ask numbers in stock quotes mean?

    These numbers are called the bid and ask sizes, and they represent the aggregate number of pending trades at the given bid ... Read Answer >>
  4. Which market indicators reflect volatility in the stock market?

    Learn the most commonly used technical indicators of stock market volatility that are watched by stock market traders and ... Read Answer >>
Trading Center