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Types of
Volatility in
Options |
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The three types of
volatility are:
Historical
volatility is a
statistical
evaluation of the
underlying stock of
an option over a
given period of time
such as the last 30
days or the last 8
weeks.
Implied
volatility is
determined based on
the current prices
of the options of an
underlying stock. So
historical
volatility is based
on past performance
of underlying stock
while implied
volatility is based
on current
performance of
options for the
stock.
Relative
volatility is
determined by a
ranking system which
utilizes the implied
volatility values of
options dating all
the way back to two
years ago. A ranking
system out of 10 is
devised and the
current implied
volatility is ranked
accordingly. The
relative volatility
is an important
parameter for a
trader to decide on
an option strategy. |
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