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Strategies & Market Trends : Options for Newbies -(Help Me Obi-Wan-Kenobe) -- Ignore unavailable to you. Want to Upgrade?

To: Slow&steady who wrote (1625)	8/30/1999 2:39:00 PM
From: ----------	Respond to of 2241

Slow & steady: Here's madpinto's answer to a slightly different question, but it contains your answer: Excellent question. I'll do my best to answer it. Volatility is the component of an option that represents risk. It is the most subjective part of an option's price. Volatility can be quantified using various option pricing models. Implied volatility represents the perceived risk in the stock's movement for a given option at a given time. For instance, a pending news event can create a situation where the market perceives the stock to have a greater probability of making a move. The option prices (calls and puts) trade for a higher price due to the belief of added risk. The sellers of the options need a greater premium to compensate themselves for taking on the additional risk. The buyers of the options pay more to protect themselves from violent moves against them. Historical volatility can be measured using the past performance of the stock. Historical volatility is an objective measurement of past action while implied volatility reflects the markets opinion of future movement. IMO, whatever specific formulae one uses, you will get a historical volitility result. Since implied volatility is a variable that changes by the minute, trying to get option prices to match up with pricing models is indeed a theory, not a science. The same thing turned me off to economics. The old formulae is C+I+G = gnp , well, once you realize that (G)overnment controls so much of the economy that G=G economics lost its' appeal. Pardon my digression. Regards, Doug