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Volatility

The rate of change in the Price of the underlying of an Option is called Volatility.

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Volatility has a serious impact on the price of the Option. It is the measure of the rate of change of the price of the underlying. Higher volatility means a high premium and vice versa. Understanding and calculating volatility help a trader in assessing the correct price of the Option.

Volatility in Options are of two types:

Historical Volatility: It measures the rate in the change of prices of the underlying over a period of time in the past.

Implied Volatility: It measures the expected rate in change of the prices of the underlying in future.

Volatility only measures the change in the price of the underlying but not the direction of change. It doesn’t tell you whether the underlying will move up or down.

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