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)
“The Obedience of Children to their Parents is the Basis of all Government, and set forth as the measure of that Obedience which we owe to those whom Providence hath placed over us.”
—Joseph Addison (1672–1719)
“Three elements go to make up an idea. The first is its intrinsic quality as a feeling. The second is the energy with which it affects other ideas, an energy which is infinite in the here-and-nowness of immediate sensation, finite and relative in the recency of the past. The third element is the tendency of an idea to bring along other ideas with it.”
—Charles Sanders Peirce (1839–1914)