19 lines
1.2 KiB
Plaintext
19 lines
1.2 KiB
Plaintext
CHAPTER 3
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Understanding Volatility
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Most option strategies involve trading volatility in one way or another. It’s
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easy to think of trading in terms of direction. But trading volatility?
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Volatility is an abstract concept; it’s a different animal than the linear
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trading paradigm used by most conventional market players. As an option
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trader, it is essential to understand and master volatility.
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Many traders trade without a solid understanding of volatility and its
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effect on option prices. These traders are often unhappily surprised when
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volatility moves against them. They mistake the adverse option price
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movements that result from volatility for getting ripped off by the market
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makers or some other market voodoo. Or worse, they surrender to the fact
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that they simply don’t understand why sometimes these unexpected price
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movements occur in options. They accept that that’s just the way it is.
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Part of what gets in the way of a ready understanding of volatility is
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context. The term volatility can have a few different meanings in the
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options business. There are three different uses of the word volatility that an
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option trader must be concerned with: historical volatility, implied
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volatility, and expected volatility. |