When it comes to options trading, one of the most important concepts you need to understand is implied volatility. In today’s volatile economic environment, knowledge of implied volatility can make it easier for you to trade options successfully.
In simple words, implied volatility is a future look at stock price fluctuations. It helps an option trader understand how volatile the markets will be in future. Unlike historical volatility that focuses on past price movements; implied volatility represents the volatility of a stock in future. It can prove to be very useful when it comes to predicting the probability of an option.
All options are sensitive to implied volatility changes. The level of sensitivity depends on the whether the option is short-dated or long-dated. Generally, short-dated options are more sensitive to implied volatility. When it comes to forecasting implied volatility, there are many important factors that have to be taken into consideration. An understanding of options trading makes it easier for traders to maximize returns and minimize risk.