Implied volatility

From Traderpedia

The volatility which is inferred by the price of an option based on one of a number of pricing models.

Implied volatility is a key variable in most option pricing models, including the famous Black-Scholes Option Pricing Model. Other variables usually include: security price, strike price, risk-free rate of return and days to expiration. If all other variables are equal, the security with the highest volatility will have the highest option prices.

Since implied volatility is forward looking, so to speak, it is very possible for the levels of historical and implied volatility to differ dramatically. Implied volatility is more important than historical volatility and it is strongly advised that people do not trade options unless they understand the basics of how volatility affects the price or premium of an option.

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