Option Volatility

Volatility is a statistical measurement of the degree of fluctuation of a market or security. Volatility is computed as the annualized standard deviation of daily percentage price changes of the security and is expressed as a percentage.

Historical Volatility (HV)

Historical volatility measures how volatile the security has been in the past. To compute historical volatility, you must first define a look-back period. Twenty day periods are commonly used as it approximates the number of trading days in a month.

Implied Volatility (IV)

Implied volatility is the volatility as implied by the market price of the security's options. The implied volatility is calculated using an option pricing model, such as the Black Scholes model, in which a mathematical relationship between the volatility of the underlying security and the price of its options has been established.

In other words, implied volatility is the market's opinion of the volatility of the option's underlying security and is determined using the following information:

In theory, for options expiring on the same date, we expect the IV to be the same regardless of which strike price we use to perform the calculation. However, in practice, the implied volatilities we obtain varies across the various strikes, giving rise to what is known as the volatility skew.

Ready to Start Trading?

Open an account at OptionsHouse.com and get 100 commission-free trades + free virtual trading tool!

Your new trading account is immediately funded with $5,000 of virtual money which you can use to test out your trading strategies using OptionHouse's virtual trading platform without risking hard-earned money.

Once you start trading for real, your first 100 trades will be commission-free! (Make sure you click thru the link below and quote the promo code '60FREE' during sign-up)

Click here to open a trading account at OptionsHouse.com now!

Follow Us on Facebook to Get Daily Strategies & Tips!

Volatility Basics

Volatility Index

Index Basics

Index Options

Options Strategy Finder

Outlook on Underlying:

Profit Potential:

Loss Potential:


No. Legs:

Join the Discussions @ The Options Forum

Beginners Questions

Advanced Strategy Talks

RSS Feed Widget

Trading Ideas & Opportunities

Home | About Us | Terms of Use | Disclaimer | Privacy Policy | Sitemap

Copyright 2016. TheOptionsGuide.com - All Rights Reserved.