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Volatility of the Underlying asset or commodity that the option is based on is an important factor in determining Options Pricing. Options in Underlying instruments that are more volatile tend to have higher values than those of a lower volatility. This is because there is a higher likelihood that Options that are currently Out Of The Money will become more In The Money and the trader can therefore close a position more profitably.

Many Options Trading strategies are based solely on the effect of volatility, either an expectation that it will increase or diminish. As such, it is possible to have a Bullish view about volatility but a Bearish opinion on the Underlying instrument (and vice versa). Strategies like straddles are designed deliberately to profit when volatility increases significantly. By contrast, strategies like butterflies and credit Spreads are more profitable when volatility contracts.
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Contributed by: Ralph Windsor

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