Volatility Summary Buy low and sell high. Or, for directional option traders, spread high use spreads on high implied volatility. All option traders are volatility traders, whether they realize it or not. Volatility is the key factor both in option pricing and in investment profitability of any options trade. A call buyer is not just bullish, but is also betting that the volatility of the stock will be more than that priced into the call. A covered call seller is investment that the volatility of the stock will be less than that implied by the option. So investment is very important to understand volatility data to be a successful options trader. There are several types of volatility. The first is definition actual volatility of the stock. This is seen in the historical volatility, which can be measured over any time frame but usually gauged in 10- 20- or option readings. This data is also seen in such indicators as the Average True Range and Bollinger Bands. Some people try to use these as alternative "VIX" measures for individual equities, but the VIX is an Implied Volatility Index and does not measure historical volatility. Implied volatility is the volatility option that is priced into individual options. The implied volatility of an option is actually backed out of the price of the option. All the inputs of an options pricing model are known time to expiration, strike, price, interest rates except for the volatility that the option is pricing in. Looking at the implied volatility allows you to get an idea of its relative value. Volatility, of course, is a measure of uncertainty. A high-volatility stock has a greater potential range than a low-volatility stock. But when we talk about the above types of option, the measure is a statistical formula that determines the one standard deviation annual distribution. One standard deviation equals 68 percent in a normal distribution. The daily data can be obtained by dividing the volatility figure by the square root of the number of trading days in a year, which is usually accepted as So if the volatility is 32 percent, the daily moves should be 2 percent divided by the square root of 252, or approximately That means that 68 percent of the time the daily moves should be 2 percent or less. This is where volatility charts are very useful, because they show the historical volatility against the average implied volatility. So implied volatility averages can be used for given months or given time frames. This allows one to get a single number for implied volatility that can be charted. Often the 30-day average implied volatility is used, as is the case with the CBOE Volatility Index VIX. There are several ways to use volatility data to value options. Option basic premise is the same with volatility as it is for stocks: Buy low and sell high. The first is to simply compare the implied volatility to the historical volatility. The theory is that if the historical volatility is greater than the implied, then the option is cheap; if the historical is less than the implied, it is expensive. This can be done using the spot data of the day, but that often presents an incomplete picture. As can be investment from the above chart, under this theory options appear expensive in early January but get much more expensive. Definition they appear cheap in late February and early March but get definition cheaper. Volatility charts allow traders to definition more thorough analysis. Comparing the implied volatility of an option to past implied volatility and historical volatility allows option higher probability trades. Many option traders focus specifically on volatility. Much research has been under the thesis that changes in volatility are much easier to predict than changes in the underlying asset prices. Option is, after all, mean-reverting and bounded both to the upside and downside. But even directional traders who only want to use calls and puts for leverage or protection can benefit greatly from a basic knowledge of volatility. When the implied volatility is low, it is a generally a good time to buy an option. When implied volatility is high, it can be a good time to sell an option or use a spread strategy. Those who stick with directional trades are best served by using call or put spreads when implied volatilities definition high. Those using covered calls are best served selling calls when they are relatively "overpriced. The implied volatility often gets inflated leading up to news releases or earnings announcements. After the news is out--when the unknown becomes known--implied volatility tends to drop sharply. This definition the reason that many traders who have bought an option before such an announcement, and been right on the direction, still lose money. Options investment risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options. Both are subsidiaries of Aperture Group, LLC. This should not be considered a solicitation to open an OptionsHouse account or to trade with OptionsHouse. This definition is being provided to you for educational purposes only. This information neither is, nor should be construed, as an offer, or a solicitation of an offer, to buy or sell securities by OptionsHouse. OptionsHouse does not offer or provide any investment advice or opinion regarding the nature, potential, value, suitability or profitability of any particular investment or investment strategy, and you definition be fully responsible for any investment decisions you make, and such decisions will be based solely on your evaluation of your option circumstances, investment objectives, risk tolerance, and liquidity needs. Election Sector Rotation Option rotation is the process where mutual funds, portfolio managers, and investors in general, shift their investments from one sector of the economy to another. Market data delivered by an Aperture Group entity. All data delayed investment 15 minutes unless otherwise indicated. OptionsHouse is separate from but affiliated with OptionMonster. Investors are fully responsible for any investment decisions they make. Such decisions should be based solely on an evaluation of their financial circumstances, investment objectives, risk tolerance, and liquidity needs. Specific securities are mentioned for informational purposes only Sign In Forgot password? Or, for directional option traders, spread high use spreads on high implied volatility Prev: Option Greeks Next: Investment Basics Options involve risk and are not suitable for all investors. Investment should not be considered a solicitation to open an OptionsHouse account or to trade with OptionsHouse This material is being provided to you for educational purposes only. All data delayed by 15 minutes unless otherwise indicated OptionsHouse is separate from but affiliated with OptionMonster.
Rachel Fox Discusses Options Trading & Defined Risk
Rachel Fox Discusses Options Trading & Defined Risk
I went to the link but I could not bring myself to play the video.
Sitting between snow-covered peaks and the Pacific Ocean, Vancouver is the perfect location for the outdoor enthusiast.