How Do You Master Option Trading Volatility Strategies?
To successfully trade stock options, a trader needs to understand the volatility of stock prices. Quite simply, the volatility of a stock is the rate and magnitude of its daily price changes. Traders use two types of volatility to assess price movements. Historical volatility is calculated directly by the price movement of a stock, while implied volatility is the market’s assumption of its volatility over the lifespan of a given stock option. The relationship between these two volatilities is what traders use to determine their trading strategies. Generally, high volatility indicates an option is overvalued and low volatility implies an undervalued option. Traders buy when options are undervalued and sell when they are overvalued. Type in the stock of interest into a stock option software package and calculate both historical and implied volatility levels Evaluate both volatilities and determine if their values are relatively high or low based on past performance. This will be given by
