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. Volatility Ratio

    The volatility ratio is a technical measure used to identify ...
  2. Volatility Smile

    A volatility smile is a u-shaped pattern that develops when an ...
  3. Vega

    Vega is a measurement of an option's sensitivity to changes in ...
  4. Volatility Skew

    The volatility skew is the difference in implied volatility (IV) ...
  5. Variance Swap

    A variance swap allows counterparties to hedge or speculate directly ...
  6. CBOE Russell 2000® Volatility Index ...

    The CBOE Russell 2000® Volatility Index is an indicator of the ...
Related Articles
  1. Investing

    Tips for investors in volatile markets

    Market volatility is inevitable, trying to time the market is extremely difficult. One solution is to invest long term. Find out the best investment strategy to handle the market volatility.
  2. 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.
  3. Investing

    Understand the Risks of Trading Inverse ETFs

    Inverse ETFs sound like a great way to take advantage of market volatility. But it's important to understand how they work before you invest.
  4. Trading

    An Option Strategy for Trading Market Bottoms

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

    The Anatomy of Options

    Find out how you can use the "Greeks" to guide your options trading strategy and help balance your portfolio.
  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. 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 >>
  3. What is a volatility smile?

    Discover what options traders mean when they refer to a "volatility smile," and learn why a volatility smile's existence ... Read Answer >>
  4. What are the most effective hedging strategies to reduce market risk?

    Learn about different hedging strategies to reduce portfolio volatility and risk, including diversification, index options ... Read Answer >>
Trading Center