Volatility and Implied volatility (Options Trading)?

Question

What's the difference?

Answer 1

Implied volatility is the amount of volatility that an underlying security would have to experience before the expiration of an option for that option to be fairly priced according to a statistical model.

Historical volatility, also known as statistical volatility, is the actual amount of volatility the underlying security has experienced for a recent past time period.

Volatility is the amount the price of the underlying security changes, usually measured as the difference between daily closing prices for the security.

Sometimes you need to take care interpretting what a writer means when he uses the word "volatility" in a sentence. He may mean historical volatility or implied volatility depending on the context of the sentence.

In the options world, all the these volatilities are normally expressed as a percentage of the price of the underlying security and are annualized.

The volatility percentage mulitplied by the underlying price (or the forward stock price if the underlying is a stock) gives you the value of one standard deviation, sometimes called sigma.

Answer 2

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