Explore Your Options  |  JUL 2003

Explore Your Options by Tom Gentile

Explore Your Options by Tom Gentile VOLATILITY What exactly is volatility and how is it used to trade options? — S.L. Volatility is simply the rate of change in a stock, index, or futures contract over a specific period of time. There are two types that we are concerned with when trading options: historical and implied. When speaking of the movement of the stock as it has occurred in the past, we’re referring to historical volatility. After using a fairly complex formula to calculate historical volatility, we can use the result to “guesstimate” where a stock should end up over the same period of time. Implied volatility is the market’s assumption of where the stock is going in the future, reflected (or implied) in its option price.

by Tom Gentile