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:
“The citizen who criticizes his country is paying it an implied tribute.”
—J. William Fulbright (1905–1995)
“What is life but the angle of vision? A man is measured by the angle at which he looks at objects. What is life but what a man is thinking all day? This is his fate and his employer. Knowing is the measure of the man. By how much we know, so much we are.”
—Ralph Waldo Emerson (1803–1882)
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—George Bernard Shaw (1856–1950)