The volatility of options is a measurement of the speed and degree of the change in value, either up or down, which is typically listed as a yearly percentage. The higher the volatility of an option, the more the price changed over the course of a trading day. The lower the volatility of an option, the less the price changed over the course of a trading day. To give you a clearer picture of how volatility is calculated, consider the fact that is equal to the change in standard deviation price at the end of one year.

There are two main types of volatility: implied volatility and historical volatility. Implied volatility (also referred to as “vols”) uses the current price of an option to illustrate the expected future volatility, from the current price to the price at the time of expiration. In other words, it is a future estimate of how much an option’s price will move.

Typically, the implied volatility of an option is higher when the market is in a bear state, and is lower when the market is in a bull state. This is because people tend to believe that bull markets carry less risk than bear markets.

Historical volatility (also referred to as “statistical volatility”) must also be taken into consideration when trading stock options. Historical volatility is often compared to implied volatility in order to determine if an option’s price is under or overvalued. This trait is a collection of information on an option for a particular period of time. Historical volatility is calculated by establishing the average deviation compared to the average price of the option, for a precise period of time. Usually a standard deviation method is used to calculate this figure; however some stock options traders prefer other methods.

Traders can benefit a great deal by gaining a firm understanding of the volatility of options. Knowing how to calculate these figures for him or herself will provide a more informed estimate of how the option is valued in regard to the trends associated with the primary stock. The volatility of options is a very effective way to measure market expectations as to how the price of the underlying assets is anticipated to trade at some point in the future. Generally speaking, the idea behind stock market options trading is quite similar to other investments, and is simply to buy when the implied volatility is low, and sell when the implied volatility is high.