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:
“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)
“What will our children remember of us, ten, fifteen years from now? The mobile we bought or didn’t buy? Or the tone in our voices, the look in our eyes, the enthusiasm for life—and for them—that we felt? They, and we, will remember the spirit of things, not the letter. Those memories will go so deep that no one could measure it, capture it, bronze it, or put it in a scrapbook.”
—Sonia Taitz (20th century)
“To revolt is a natural tendency of life. Even a worm turns against the foot that crushes it. In general, the vitality and relative dignity of an animal can be measured by the intensity of its instinct to revolt.”
—Mikhail Bakunin (1814–1876)