Volatility Overview

Last modified 11:18, 5 Nov 2012


Volatility is an important factor in an options price.

Put simply, volatility is a measure of how much the underlying stock price is fluctuating, or is likely to fluctuate.

There are two measures of volatility : Historical and Implied

Historical Volatility

Historical Volatility (also known as Statistical Volatility) calculates the average price movement of an underlying stock over a specified period of time.

It does this by determining the range of stock price movement within a set period and using this to establish a mid point. The percentage of movement from the midpoint to either extreme gives the historical volatility of the stock price within that period.

Your SOFTWARE's volatility chart can display a number of Historical Volatility plots, each using a different calculation period.

Implied Volatility

Implied Volatility calculates the average price movement of all options with the same strike price and expiry date over a specified period of time. A number of different factors are included in this complex calculation, also referred to as a “pricing model”.

An Average Implied Volatility of all of the options available for an underlying security is calculated on a daily basis. It does so by calculating the implied volatility of each option for that security, discarding those that are very deeply in- or out-of-the-money and adding a weighting to those that are at-the-money and closest to expiry.

The Volatility Chart can display a number of Average IV plots for different periods or different groups of options.

This allows users to compare changes to the Average Implied Volatility of the options with the performance of the Historical Volatility of the underlying instrument.

For information on setting the parameters for the periods or groups to be averaged, refer to the Volatility Charts - Parameters and Appearance topic.

Volatility Chart Topics

Click on the following links for more information on these topics:

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