Implied Volatility As Measure of Relative Value
Often, the implied volatility of an option is a more useful measure of the option's relative value than its price. The reason is that the price of an option depends most directly on the price of its underlying asset. If an option is held as part of a delta neutral portfolio (that is, a portfolio that is hedged against small moves in the underlying's price), then the next most important factor in determining the value of the option will be its implied volatility.
Implied volatility is so important that options are often quoted in terms of volatility rather than price, particularly between professional traders.
Read more about this topic: Implied Volatility
Famous quotes containing the words implied, measure and/or relative:
“As for the graces of expression, a great thought is never found in a mean dress; but ... the nine Muses and the three Graces will have conspired to clothe it in fit phrase. Its education has always been liberal, and its implied wit can endow a college.”
—Henry David Thoreau (18171862)
“As soon as man began considering himself the source of the highest meaning in the world and the measure of everything, the world began to lose its human dimension, and man began to lose control of it.”
—Václav Havel (b. 1936)
“And since the average lifetimethe relative longevityis far greater for memories of poetic sensations than for those of heartbreaks, since the very long time that the grief I felt then because of Gilbert, it has been outlived by the pleasure I feel, whenever I wish to read, as in a sort of sundial, the minutes between twelve fifteen and one oclock, in the month of May, upon remembering myself chatting ... with Madame Swann under the reflection of a cradle of wisteria.”
—Marcel Proust (18711922)