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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