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Historical Volatility, Implied Volatility


The volatility of an asset provides a measure of the random variability or dispersion of price data per unit of time, usually quoted as the annual standard deviation of an assetís price. An asset has high volatility if its price fluctuates widely over time, and low volatility if the price is relatively stable. Volatility is generally categorized into two types, historical volatility and implied volatility. When news comes out, this can dramatically affect implied volatility and your expectations of volatility in the short term and possibly in the long term.

Historical Volatility

Historical Volatility is the standard deviation of the asset price returns, based on recent historical data. It is usually expressed as an annualized volatility level. Thus, it is a measure of the recent dispersion in the price of the asset.

Implied Volatility

Implied Volatility is the level of volatility that will result in the calculation of option fair value that is equal to the current trading option price. So it is the volatility that is inferred from the price at which the option is trading. It reflects the current market consensus of the volatility. It measures whether option premiums are relatively expensive or inexpensive, whether that premium is truly warranted or not.


The VIX was established by the CBOE in 1993. It is a measure of stock market volatility and uncertainty. Although the VIX is only a general measure of volatility in the OEX, trader's use this as a general indication of index option implied volatility and as an indicator of volatility of the U.S. equity market. It is calculated based on option activity. High values indicate fear or pessimism in the market. Low values indicate complacency or optimism in the market. It is generally used as a contrarian indicator of investor sentiment, so high values indicating widespread fear in the market is a bullish sign that the market may soon reverse.


A measure of how a stock's movement correlates to the movement of the overall stock market. Beta is not the same as volatility, but related to it. With Beta for the overall market set at a value of one, then stocks with Beta greater than one have a higher volatility than the overall market. This could provide greater returns in an up market and greater losses in a down market, thus they are riskier than the market with a higher probability of outperforming the market. An equity with Beta equal to 1.3 has 30% higher volatility than the overall market. If the market moved up 10% over a specific time period, this equity would be expected to have moved up about 13%. Stocks with Beta less than one have a lower volatility than the overall market. Equities with negative Beta move inversely with the market - if the market goes up, they tend to move downward and if the market goes down, they tend to move upward.

When you are analyzing potential option positions, it helps to have a computer program like Option-Aid that swiftly calculates volatility impacts, probabilities, statistics, and other parameters of interest. These programs can pay for themselves with the first trade that they help you with.

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