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.
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Famous quotes containing the words implied, measure and/or relative:
“Christianity as an organized religion has not always had a harmonious relationship with the family. Unlike Judaism, it kept almost no rituals that took place in private homes. The esteem that monasticism and priestly celibacy enjoyed implied a denigration of marriage and parenthood.”
—Beatrice Gottlieb, U.S. historian. The Family in the Western World from the Black Death to the Industrial Age, ch. 12, Oxford University Press (1993)
“Both the man of science and the man of art live always at the edge of mystery, surrounded by it. Both, as a measure of their creation, have always had to do with the harmonization of what is new with what is familiar, with the balance between novelty and synthesis, with the struggle to make partial order in total chaos.... This cannot be an easy life.”
—J. Robert Oppenheimer (1904–1967)
“Are not all finite beings better pleased with motions relative than absolute?”
—Henry David Thoreau (1817–1862)