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 (1817–1862)
“Speech is the twin of my vision, it is unequal to measure itself,
It provokes me forever, it says sarcastically,
Walt you contain enough, why don’t you let it out then?”
—Walt Whitman (1819–1892)
“Personal change, growth, development, identity formation—these tasks that once were thought to belong to childhood and adolescence alone now are recognized as part of adult life as well. Gone is the belief that adulthood is, or ought to be, a time of internal peace and comfort, that growing pains belong only to the young; gone the belief that these are marker events—a job, a mate, a child—through which we will pass into a life of relative ease.”
—Lillian Breslow Rubin (20th century)