The Technical Trader

The chart shows where price went. Volatility shows how far it can swing.

Volatility is the number behind every option price. See how it works with the demo, then read the full guide.

Read the volatility guide

This takes you to OptionTradingTips.com.

Same $100 share, different volatility

Sixty trading days of simulated prices. Drag the slider to change how much the share swings.

Simulated share price over 60 trading days A line chart of a simulated share price starting at 100. The higher the volatility setting, the wider the price swings. $200 $150 $100 $50 Day 0 Day 30 Day 60
Volatility measured from the 60 daily moves
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Typical one-month move
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Price of a 30-day at-the-money call
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Simulated prices for illustration, not a real share. The call price is a theoretical Black-Scholes value with a 4% interest rate. The typical move is one standard deviation.

Two kinds of volatility

Traders compare them to judge whether an option is cheap or expensive.

  • Historical volatility Measured from a share's past closing prices. It tells you how much the share has actually been swinging.
  • Implied volatility Worked backwards from what options are selling for, using a pricing model. It is the market's estimate of how much the share will swing in future.

Why it matters for option prices

All else equal, higher volatility means higher option prices. Try it in the demo: move the slider up and the call price rises with it.

That is why many traders compare the two measures. If implied volatility is well above what the share has actually been doing, the options may be expensive. If it is well below, they may be cheap. It is a way of asking a question, not a guarantee of an answer.

Selling options when volatility is high can bring in more premium, but it carries real risk, especially around earnings, when prices can jump.

What the full guide covers

It is part of the free Options 101 section on OptionTradingTips.com.

  • Historical and implied volatility compared Including real examples of a fast-moving share next to a steady index fund.
  • Whether volatility drifts back to its average And what that could mean for people buying options and people selling them.
  • Earnings and the volatility drop afterwards Why options can look expensive before earnings, what happens to implied volatility once the news is out, and two strategies traders use around it.
  • A free volatility workbook Calculates historical volatility so you can run the numbers on your own shares. You enter an email address to download it.

Put a number on the swings

Read how volatility is measured, how to compare it with what options are pricing in, and where it can trip people up.

Read the volatility guide