Implied Volatility refers to the Volatility of the Options contract as implied by its price.
Options prices are strongly influenced by the perceived Volatility of the Underlying asset or commodity which an option contract is derived from, to the extent that Options are regarded by some as almost entirely about trading Volatility.
Implied Volatility tends to rise as the market becomes more Bearish about the Underlying and it usually declines as it becomes more Bullish.
Implied Volatility levels will help Options traders to determine whether Long or Short Options strategies are more suitable. When implied Volatility is low, Long Options offer better value and when implied Volatility is high, a Short Options Strategy will be more profitable.
Note these are general principles and one cannot necessarily predict whether Volatility trends will continue (i.e. high implied Volatility increases still further, low implied Volatility continues to decline).
Contributed by: Ralph Windsor
Options prices are strongly influenced by the perceived Volatility of the Underlying asset or commodity which an option contract is derived from, to the extent that Options are regarded by some as almost entirely about trading Volatility.
Implied Volatility tends to rise as the market becomes more Bearish about the Underlying and it usually declines as it becomes more Bullish.
Implied Volatility levels will help Options traders to determine whether Long or Short Options strategies are more suitable. When implied Volatility is low, Long Options offer better value and when implied Volatility is high, a Short Options Strategy will be more profitable.
Note these are general principles and one cannot necessarily predict whether Volatility trends will continue (i.e. high implied Volatility increases still further, low implied Volatility continues to decline).
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