Volatility refers to how much a stock's price fluctuates over time. There are two types of volatility: historical volatility, which is measured based on past price changes, and implied volatility, which is what the options market expects volatility to be in the future. Implied volatility is important for options traders to understand because it affects how options are priced - high implied volatility means options are overpriced, while low implied volatility means they are underpriced. Events like earnings reports, market declines, and commodity shortages can cause implied volatility to rise, while extended periods of positive market sentiment or sideways trading can cause it to fall. Options traders can check the implied volatility of a stock on their platform by looking at indicators like

1. What does volatility mean?
1
Options Trading

2. What is volatility?
Volatility is critical to understand if you want to trade
successfully. There are two types of volatility.
First let's look at the Investopedia's definition of volatility.
2

3. What is volatility?
"Volatility is a statistical measure of the dispersion of
returns for a given security or market index. Volatility can
either be measured by using the standard deviation or
variance between returns from that same security or
market index. Commonly, the higher the volatility, the
riskier the security."
In layman terms: volatility is how much usually a stock
moves annually. For example if there is a stock price at
100 and the high was 120, the low was 80 that year, we
can say that it had 20% volatility. So you can think of
volatility as the movement of stock. The higher the
volatility, the more the stock moves.
3

4. The two types of volatility in options
trading
The above volatility is called historical or statistical volatility.
That means it has already happened in the past.
The other type of volatility is called Implied Volatility (IV),
which is often referenced in options trading. IV is a priced
volatility, it hasn't happened yet but the option pricing
implies that it might happen in the future, hence the name
implied. The higher the IV, the more volatility the market is
expecting.
When IV is high, options are overpriced, when it is low,
they are underpriced. This is crucial to understand because
it does matter if you want to make a buy or sell decision.
Obviously you don't want to buy an overpriced option and
sell an underpriced one. 4

5. What does affect Implied Volatility
in options trading?
There are different scenarios when you can be sure that
IV will rise:
1. Earnings for a stock, when people start to speculate
and option volume rise. As everyone starts to buy
those options they tend to be overpriced, hence IV
gets high.
2. Market panic when SPX is falling. All traders run and
buy Put options as a hedge or protection. That is why
they get overpriced, hence IV gets high.
3. A commodity gets scarce. For example there is a
shortage of corn and people start to buy those call
options. IV gets high again.
5

6. What does affect Implied Volatility
in options trading?
There are scenarios when IV decreases:
1. Over-optimistic sentiment in the stock market. People
only buy stocks, everyone is happy. This is when VIX is
low.
2. After earnings, IV collapses because the speculation is
over.
3. Sideways market movement when there is nothing
interesting happening.
6

7. How to check Implied Volatility?
Every options trading platform serves you with an IV
indicator. Only stocks that have options have IV, obviously.
Without options, there is no IV, because IV is derived from
options pricing algorithms.
Below you can see the chart of SPY, where at the bottom
there is the IV, marked with the blue indicator. As you can
see IV is pretty low right now, which means optimism is
widespread. This is exactly when something is going to
happen in the near future and market starts to fall again
and IV will rise. The red line presents historical volatility.
7

8. How to check Implied Volatility?
8

9. Feel free to ask me!
9
Email: gery@optionsrules.com
My webpage: http://www.optionsrules.com/
You can find me:
Facebook: https://www.facebook.com/OptionsRules1
YouTube: https://www.youtube.com/user/optionsrules
Twitter: https://twitter.com/optionsrules
LinkedIn: http://hu.linkedin.com/pub/gery-nagy/6a/513/261
Skype: opcioguru