2 Distinct Concepts That Options Traders Need to Know

Market volatility is starting to tick back up as macro headlines from Iran/Iraq come in.

And now, we enter the think earnings season which not only will cause big moves in the individual names but over the past few years has proved to be a volatile first quarter. More specifically, on individual names that are about to report earnings we see implied volatility increase in anticipation of the event. But how does an increase in volatility, which basically is a measure of price change magnitude within a given time frame, impact options’ values?

To understand this, we need to turn to the Greek’s; Vega. Options traders sometimes use these terms interchangeably, and while they are related, they are two distinct concepts.

Volatility

Volatility is one of the five inputs used in the basic Black-Scholes options pricing model. Higher volatility means higher option prices. That’s because higher volatility means greater expected price swings.

So, it follows that… Continue reading at StockNews.com

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