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This article is from the Investing Articles:
Stocks and Options series.
Futures & Options: Volatility
Volatility
is the key to trading options effectively. This is because
volatility is a primary determinant of an option's price. So
what is volatility? Volatility is a measure of the degree of
change in a stock's value stated as a percentage over one-year.
Mathematically, volatility is a one standard deviation price
change, in percent, at the end of a one-year period.
Simply stated, a high volatility
means that the stock, index or future has a very good chance of
moving big. A low volatility stock, index or future has a very
good chance of not moving much at all! Let's say a trader has
bought a call option on a stock. The trader wants the stock to
go higher as quickly as possible. An indication of the
likelihood of the stock going higher (or lower) is the
volatility. The higher the volatility, the better the chance
your stock will jump higher, and hence the better the chance the
call option will be worth more in the future. If an option has a
good chance of being worth more in the future, it usually costs
more to buy it now.
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day trading, stock dividents, interest rates, preferred stock, short sale, stock warrants, futures, options, volatility, calls, puts, covered calls, financial information, investing, investment tools, reference
