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What You Need to Know About Implied Volatility

Implied Volatility

15Also referred to as “vols.”, Implied Volatility is normally abbreviated as IV and denoted by  (sigma). Generally, it is a very important concept for the option pricing equation determined by an option pricing model. If you are an investor, you really need to pay attention to this important market ingredient.

It is a concept that traders use to understand the future volatility of the market by approximating the future value of an option. It is also used to calculate profitability of assets. The concept is among the factors you can use to decide your future pricing options. Typically, IV is a crucial ingredient of straddle option that can be very helpful in determining the possibility of a stock attaining a specific price at a given pre-determined time.

Historical volatility

The concept is the direct opposite of low volatility options trading or rather statistical volatility or realized volatility. Whereas IV determines future market profitability, statistical volatility measures the past market changes and the exact results. Actually, this concept depends on historical volatility since to predict future market variations, the concept relies on past market changes.

Basically, weekly credit spreads strategy is based on probability and not indication. This means, it just estimates future prices but does not provide their indication. Therefore, you need to keep in mind that the concept does not provide you with market forecast direction hence it is not guaranteed that the forecasts generated by the concept will be actual. It is also important that you understand that this ingredient or concept does not provide prediction to the direction of the price changes. For instance, as much as high volatility translates to high price shift, the price can shift too high or too low or even both.

However, if you are an investor, it can greatly help you in considering your future actions because it is directly associated to the market opinion that affects option pricing. With IV, you can decide to buy or sell your asset at a specified price during a certain period in the future.