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What is volatility?People often ask, what is volatility? It is a measure of the rate and magnitude of the change of prices (up or down) of the underlying stock. Two measures of volatility are commonly used in options trading: historical volatility and implied volatility. Historical volatility refers to the degree of price change in an underlying stock over a specific period of time. Implied volatility is a prediction of expected volatility. Volatility can be used to calculate the fair market value of an option and determine if options are over priced or under priced. Using the Black Scholes Model of option pricing, developed by Fisher Black and Myron Scholes in 1973, you can calculate the fair market value for any option, the model incorporates a number of variables, which include time to expiration, historical volatility and strike price.Leave What is volatility? and go to Home Page
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