Bank of Market

Option Volatility

Knowing Volatility

Historical Volatility is defined as statistical calculation that informs option traders how fast price movements have been over a particular time frame. The most typical way of calculating historical volatility is known as the Standard Deviation.

 

The more spread out the information is, the greater the deviation. This is known by dealers as volatility.

 

Do not work over too much in trying to comprehend the how’s and why’s of their standard deviation, understanding that all traders utilize this way of discovering historical volatility is all you need to do, no more than that.

 

Assets that possess high and recurring price flows are reported to be highly volatile be of high. Thus, assets whose price flows are less volatile are considered less volatile.

 

Take glimpse of the following high and low volatility assets.

 

High Volatility

Low Volatility

What is the significance of volatility to option traders? It is because volatility is considered as the possibility of change in assest value later on. High volatility assets is expected to possess large price changes later on. Because of this, options which are based on resources with higher volatility could be expected to get higher costs.

 

The greater the volatility, the more probable it is that the underlying asset will exchange higher (or lower) than the exercise price from the expiry date.

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