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Options Trading and Market Volatility


Volatility is one of the most important factors that determines an option's price. It measures the amount by which an underlying asset is expected to fluctuate over a given period of time. Volatility significantly impacts the price of an option's premium and heavily contributes to its time value.

In basic terms, volatility can be viewed as the rate of (price) change in the market, although you may prefer to think of it as “market confusion”. The more “confused” a market is, the higher the likelihood of an option ending up in-the-money. In contrast, a stable market moves slowly.

Volatility measures the rate of (price) change of an underlying instrument. The higher that volatility, the more likely it is that an option will become profitable before it expires. That is the reason why volatility is a primary determinant of option valuations.

There are options strategies that can be used to take advantage of volatility.

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