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)
“I candidly confess that I have ever looked on Cuba as the most interesting addition which could ever be made to our system of States. The control which, with Florida, this island would give us over the Gulf of Mexico, and the countries and isthmus bordering on it, as well as all those whose waters flow into it, would fill up the measure of our political well-being.”
—Thomas Jefferson (1743–1826)
“In a country where misery and want were the foundation of the social structure, famine was periodic, death from starvation common, disease pervasive, thievery normal, and graft and corruption taken for granted, the elimination of these conditions in Communist China is so striking that negative aspects of the new rule fade in relative importance.”
—Barbara Tuchman (1912–1989)