Volatility | ||
If the price of the underlying stock changes frequently, the option will cost more.
Volatility: The volatility is a measure of how likely it is that the underlying stock price will change. This is typically computed by taking the standard deviation of price changes over time. Different option pricing models will use different time periods as a basis for computing volatility. The price of both the call and the put increase as the volatility increases. The a stock's volatility changes frequently, it can change as result of actual or anticipated changes in the underlying stock price. Changes in volatility can occur over days and weeks or even intra-day. Numerous option strategies trade on the basis of selling options which are more expensive during periods of higher volatility and buying options during periods of low volatility.
|
