In addition, options often increase in price even if the price of the underlying stock doesn t move anywhere. Markets with lots of volatility trigger an inflation of option prices. Historical volatility is calculated by using the standard deviation of underlying asset price changes from close to close of trading going back 21 to 23 days. Implied volatility is a computed value that measures an option s volatility, rather than the underlying asset. The computed fair value may differ from the actual market price of the option.
Implied volatility is the volatility needed to achieve the option s actual market price.
Volatility is a very important piece of the puzzle, not only for analyzing an option s value, but for assessing a market s inclination for dramatic price movement. In its most basic form, volatility means change. Since implied volatility is a computed value, it is best calculated with the aid of a computer that can easily match theoretical option prices with current market prices of the option. Volatility can be estimated without the use of a computer. Calculating an option s implied volatility is a very complicated process that uses options-pricing models to assume the future price movement of the underlying instrument.