There are different types of volatility in the stock
options market. There is historical Volatility. Which has a direct
link with price higher volatility usually means higher prices option
traders try to predict future volatility price based mostly on the
past history of a stock’s volatility or movement.
Future volatility for a specific time period in the future. This is where
your trading experience comes in. You may build your forecast on a set
of assumptions different from other traders in options.
You might think the stock option you are selling is correctly
priced while the buyer feels it is under priced. Professional traders
will stay away from overpriced options. Option traders might feel that
an option is over priced but will buy it anyway because they think the
profit potential will justify the purchase. This is usually a mistake.
Another volatility is called implied volatility. Implied
volatility for your bid is lower than other option traders, You are
implying that you think there will be more future volatility and thus
potential higher prices. You should remember that every time any of
the variables change, so does the outcome of the option prices.
Option trading can be tough to learn but in the end you can make more
money on trading options then the stock. buying one option contract is
the equivalent to buying one hundred shares of the stock. The big
difference is that you will have an expire date that you need to deal
with.
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