Volatility Is The Most Important Factor in Option Trading

Understanding the concept of volatility is necessary to option trading success. A trader who can be aware of whether a given option is cheap or expensive on a historic basis has a great advantage in the marketplace. Flexible traders can buy premium when volatilities are low and sell premium when volatilities are high. They can set up spreads in which they buy inexpensive options and sell expensive options, thus obtaining the best of both worlds. These are key steps in time after time placing the odds as far in your favor as possible. To gain a meaningful understanding of volatility as it relates to option trading, you should learn three topics:

1. Historical (or statistical) volatility