Volatility
Volatility measures the relative rate at which price moves up and down. Volatility is measured by calculating the annualized standard deviation of daily change in price. If the price moves up and down rapidly over short time periods, it has high volatility. If the price almost never changes, it has low volatility.
Option Volatility
Volatility is an essential element in an option’s price level, called premium.
- If volatility is high, the premium on the option tends to be relatively high
- If volatility is low, the premium on the option tends to be relatively low
Premium is the cost or value of an option. This is discovered on an exchange through competitive bids and offers, and constitutes the consensus value of what the rights to buy or sell the underlying commodity at various strike prices is worth at any given point in time.
